1099 vs W-2
1099 vs W-2 is the US tax-form shorthand for the distinction between an independent contractor (reported on IRS Form 1099-NEC) and an employee (reported on IRS Form W-2). Classification is determined by the facts of the working relationship, not by the form you choose — the IRS applies the common-law test, and states apply their own variants (including the stricter ABC test in California, Massachusetts, New Jersey, and others).
Core practical differences
| | 1099 Contractor | W-2 Employee | |---|---|---| | Who withholds tax | The worker | The employer | | Benefits | None required | Usually provided, some mandatory | | Payroll tax | Worker pays self-employment tax (15.3%) | Employer pays half of FICA | | Workers compensation | Not required | Required in most states | | Unemployment insurance | Not eligible | Covered | | Control over work | Worker directs their own work | Employer directs |
Why choosing wrong is expensive
If the IRS or a state agency reclassifies a 1099 contractor as a W-2 employee, the employer owes back payroll tax, workers compensation premiums, unemployment insurance contributions, possible overtime and minimum-wage back pay, and civil penalties. Exposure commonly runs 30-60% of wages paid.
How to get it right
Apply the IRS common-law test at the start of every contractor engagement. In California, Massachusetts, New Jersey, and other ABC-test states, apply the ABC test instead. Document the reasoning. If in doubt, classify as W-2 — the cost of over-classifying is salary cost; the cost of under-classifying is legal exposure.