A 1099 and a W-2 are both tax forms that report income to the IRS (Internal Revenue Service). That being said, they are also terms that are commonly used to describe the way in which someone works.
Meaning that if you are an independent contractor, people often refer to that as a being a “1099’er” or “Working 1099”. If you are a full time employee at a company, you are often referred to as being “W2”.
Chances are you’re reading this because you don’t make an hourly wage and want to know how much tax you’ll need to pay. Or, you ARE a W2 employee and want to know how much you could be saving on taxes if you switched over to being an independent contractor. Either way, a 1099 vs W2 calculator could help you.
This post will cover exactly what a 1099 and W-2 are and what the pros and cons of each one are. On top of that, there will be instructions on how you can get your hands on your very own dynamic 1099 and W2 calculator! Let’s dive right in.
What is a W-2?
A W-2 is simply a tax form where businesses report the amount of annual income they pay out to and the payroll taxes withheld from their employees.
On your end as the employee, you’ll receive a form by January 31 come tax time detailing how much you’ve earned the previous year, how much was deducted for taxes, and how much was contributed to retirement plans. Then you’ll assemble your income tax return, send it to the IRS, and hope for tax refunds.
You use this form to help you file your tax return. The IRS will also get a copy of this so they know how much money you made and how to tax you accordingly.
The W-2 form typically contains:
- Personal contact information from the employee and social security number
- EIN or the Employer Identification Number which is how the IRS knows the company
- Employer name and information
- Tax deductions (E.g medicare taxes, social security taxes, health insurance premiums)
- Salary and bonuses
Keep in mind that the W-2 is only sent to “full-time” employees.
What is a 1099?
A 1099 form is similar to a W-2 in that both are documents the business provides to you at the end of the year. The difference with 1099s is that they are only sent to independent contractors.
Any business or individual that pays an independent contractor more than $600 in the calendar year is responsible for sending the contractor a completed 1099 form. A copy will also get sent to the IRS for their records.
From the independent contractor’s lens, you will be receiving a 1099 for each of the clients they worked for. You will then need to use the sum total of your 1099s to calculate your total income.
If you read into it, you’ll find that there are tons of 1099 forms. For example, the 1099-DIV, or 1099-INT, or 1099-G. Don’t worry about these. For your purposes as an independent contractor, you’ll likely only run into the form 1099-MISC or form 1099-NEC.
Despite all the similarities, an important distinction for the 1099 is that they are only given to independent contractors which means that businesses are not liable to paying a share of federal or state income taxes and won’t deduct any payments to social security or medicare trust funds.
Employee Vs. Contractor
As a worker, it’s crucial to understand when you’re an employee and when you’re an independent contractor. The distinction will make the difference regarding which tax form you’ll receive. It might not seem like a big deal, but the consequences for misclassification are huge! Uber was sued by its drivers for more than $100 million over misclassifying a driver as an independent contractor… this is something you really want to get right.
This section will cover what exactly classifies someone as a W2 employee and what classifies someone as a 1099 contractor.
When it comes down to it, every state is a little different. This is why the IRS has come up with 3 broad criteria to help determine who is an employee and who is a freelancer. The 3 tests are behavioral control, financial control, and type of relationship.
Behavioral control is the degree to which a business controls its worker’s time, work-life, and tools. If someone is being trained, directed for tasks, and has specific hours, the IRS will probably classify them as an employee.
Similar to behavioral control, financial control describes the extent to which a business has control over its workers’ money. Some traits of employees are salaries or guaranteed company wages.
Finally, type of relationship describes how a business interacts with its workers. If a worker provides services that are related to the business’ core work, the IRS will likely view them as a W-2 worker. Similarly, if someone receives sick days and health insurance, they are likely to be classified as an employee.
As a quick run-down, W-2 employees usually:
- Get paid a regular wage
- Receive employee benefits
- Have their work schedule dictated by their employer
- Have taxes withheld from their wages
- Receive more protection: severance, worker’s compensation, anti-discrimination, unemployment insurance / unemployment benefits
Someone in an independent contractor position is fundamentally someone independent of the hirer. We can run the 3 IRS tests to see who fits in this category.
When it comes to behavioral control, independent contractors typically do their own thing. If the worker sets their own hours and decides how (and when) they’re going to get the job done, the IRS is likely to classify them as an independent contractor.
In terms of financial control, the distinction again is that employers have less of it with independent contractors. If a worker is paid a flat fee per job or project, it’s likely they are a contractor.
Finally, when it comes to type of relationship, it’s usually easiest to look at permanency. If a company hires someone to do a set amount of work for the short term, they are likely going to be classified as an independent contractor.
For a quick summary, independent contractors usually:
- Get paid for projects
- Handle their own taxes
- Work when they want
- Work where they want
- Are otherwise known as “self-employed”
1099 vs W2 Which is Better for Employee
If you’re a W2 employee, it’s likely that you’ve considered switching over to contract work on more than one occasion. Before you make any meaningful change in your life, it’s important to weigh the advantages and disadvantages. Here are some pros and cons of being a 1099 worker vs a W2 employee.
Switching to 1099 work pros:
- Set your own prices
- Set your own schedules
- Work in your own home office if you want
- Receive higher pay
- A few tax advantages
Switching to 1099 work cons:
- Pay income tax + self-employment tax
- Don’t receive overtime pay
- Not covered by liability insurance
- Don’t receive retirement / pension benefits
- Don’t get sick days or vacation hours
- You might need to pay quarterly taxes and deal with the hassle of quarterly tax payments
At the end of the day, it really comes down to control. Someone who hates being told what to do and wants control over their own time may be better suited to switch to 1099 work. On the contrary, if you’re content to receive standard pay and lots of benefits from work (and are more risk-averse) it may be best to stay in your W2 position.
1099 vs W2 Calculator
If you’re curious about what your taxes would look like should you switch to independent contracting work, there is an easy way to find out: use the 1099 vs W2 calculator!
Simply input your income, business expenses, salary percentage, and 401k retirement plan contribution amounts and the calculator will give you an estimate of your taxable income and how much you can expect to pay in taxes for the year. Also, if you’re a small business owner, it might make sense to incorporate yourself. Hence, there is a bonus column showing how much you might pay if you are receiving S-Corp income (the annual income will go to gross income instead of personal level income in the S-Corp income column).
As you can see in the calculator, depending on how much income you make, you could be able to take advantage of the low self-employment tax rate of 15.3%. (and it isn’t hard to get past that threshold: federal income taxes rise fast with income levels!)
If you’re a freelancer or independent contractor currently with a sole proprietorship, you might be considering incorporating yourself but don’t know how. This is great news because if you sign up for this course on how to incorporate your business, you’ll also receive access to the 1099 vs W2 calculator you see above. The best part is that you won’t need to break out your credit card because this course is absolutely free! Truly a win-win!
Get Your 1099 vs W2 Calculator Now!
At the end of the day, the W2 and the 1099 are both tax returns that you’ll receive detailing how much money you’ve made. A full-time employee will receive the W2 and an independent contractor will receive the 1099.
Whether you should switch from being a W2 worker to a 1099 worker is completely up to what you value. If you value control over how you do things, then making the switch might be a good idea. On the other hand, if you value stability and security, you might be better off sticking to a W2 position.
Regardless, you’ll likely want to know how much you COULD be saving in taxes if you switched to independent contracting work (or better yet, if you incorporated yourself). A W2 vs 1099 calculator could really help with that. All you need to do is sign up for this free course, and the calculator is all yours!