A 1099 and a W-2 are both year-end tax forms that report your income to both you and 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 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 are an independent “1099” contractor and want to know how much tax you’ll need to pay. Or, you are a full-time “W2” employee and want to know how much your taxes would change if you switched over to being an independent contractor. Either way, our 1099 vs W2 calculator could help you.
This post will cover exactly what the 1099 and W-2 forms are, and also what the pros and cons are of working either as a 1099 contractor or W2 employee. 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 form?
A W-2 is a tax form where businesses report the amount of annual gross income they payout to an employee and the payroll taxes withheld from the 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 a tax refund).
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” and “part-time” employees being paid through a companies payroll system.
What is a 1099 form?
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. They can be sent to independent contractors that are not incorporated, as well as ones that have an LLC.
Any business or individual that pays an independent contractor or an LLC 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, so they know how much the contractor was paid.
From the independent contractor’s lens, you will be receiving a 1099 from each of the clients you 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.
It’s important to understand that 1099s are only given to independent contractors, and it means that businesses are not required to deduct any of the contractor’s income taxes or payroll taxes on the contractor’s behalf. The business also does not have to pay any employer-covered payroll taxes for that worker.
The independent contractor has to take care of reporting their income and paying in all those taxes themselves. This gets done via the “self-employment” tax on the “schedule c” of the contractor’s personal tax return.
Employee Vs. Contractor
As a worker, (and even more so as the hiring business), it’s important to understand when you are an employee and when you are an independent contractor. The distinction will make the difference regarding which tax form you’ll receive.
This section will cover what might classify someone as a W2 employee and what classifies someone as a 1099 contractor.
What is a “W2” Employee
When it comes down to it, every state is a little different. Some are more rigid than others. CA has more recently led the charge on being more “strict” about it. Read more about CA’s recent AB5 law on the matter.
But federally speaking, the IRS has come up with 3 broad criteria to help determine who is an employee and who is a freelancer or independent contractor. 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. If someone works at home on their own equipment, can determine their own hours, and works for multiple clients, they would likely be a contractor.
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. Independent contractors would generally be setting their own price, one contract at a time (though their pay is generally governed by the market conditions regardless).
Finally, the 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. But if the company does photography and the provider does plumbing, then it’s a clear distinction.
As a quick run-down, W-2 employees usually:
- Get paid a regular wages on an ogoing basis
- Have their work schedule dictated by their employer
- Only work for one client
What is a “1099” Contractor
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, with a definitive work product result, it’s likely they are a contractor.
Finally, when it comes to the 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 more likely going to be classified as an independent contractor.
For a quick summary, independent contractors usually:
- Get paid project by project
- Work on their own equipment
- Have control over when they work on teh project (relativley speaking)
- Work for multipe clients
1099 vs W2: Which is Better?
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 potentially
- Receive higher pay potentially
- Control you schedule more
- Get siginificant tax advantages potentially
Switching to 1099 work CONS:
- Pay extra self-employment tax
- Not covered by liability insurance
- Don’t receive retirement / pension benefits
- Don’t get sick days or vacation hours
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 our 1099 vs W2 calculator!
Simply input your income, business expenses, and even your 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 are an independent contractor, 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. For S corps you can put in what percentage of profit your salary will be. Ask your CPA about this, as that can vary depending on what you do.
DISCLAIMER: Please be advised that I am not a CPA. Verify all results with your own CPA. Also note that the tax code changes annually, so calculation percentages will change over time. This calculator was last updated in early 2021.
Also, be aware that this example shows a potential tax for a single person that is not itemizing on their personal tax return. It also only shows federal taxes only. It does not include state taxes.
As you can see in the calculator, depending on how much income you make, you may be able to do better tax-wise as a 1099 or Scorp While it’s true that you will have to pay self-employment tax, you could possibly overcome that because will have more business deductions to take advantage of.
Furthermore, if you go the S-corp route your self-employment tax can potentially be reduced, depending on how much salary your CPA says you should take. So, if you’re a freelancer or independent “1099” contractor currently, you might be considering incorporating yourself.
Now if you want to know more about that topic, you should sign up for our free mini-course on how to incorporate your business. In the course, you’ll also get access to the 1099 vs W2 calculator you see above.
Get Your 1099 vs W2 Calculator Now!
At the end of the day, the W2 and the 1099 are both year-end tax forms 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 dependent on your situation of course. 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 your taxes will differ if you switched to independent contracting work (or even if you incorporated yourself). Our W2 vs 1099 calculator will help with that (obviously)!
Enroll in our free mini-course on how to incorporate your business, and the calculator is all yours! Enjoy!