In the tricky world of tax codes, there are lots of definitions to wrangle and forms to fill out. One of the most common face-offs is between W-2 workers and those on 1099 arrangements.
The question, then, is how these distinct categories differ from one another and how this is relevant when the time comes to fill out any paperwork that pertains to your employment. Read on to find out the answers to any overarching queries you might have.
W-2 & 1099 Explained
In the simplest terms, anyone who is currently employed full time by a business will be a W-2 worker for the purposes of taxation, meaning that their salary and benefits all come from the same source.
Meanwhile a 1099 worker will be a freelancer, categorized as self-employed rather than being permanently attached to a given organization, even if you do most of your work for just one company as a contractor.
Before you pick up a pen to enter your details into either form, it is best to learn how to fill out a W2 or a 1099 document, depending on which fits your circumstances and needs best. If in doubt, ask for help from your employer or consult a tax specialist to avoid any confusion.
Bear in mind that this is relevant not just to employees, but also to employers. Any business owners will need to make sure that the correct forms and statuses are assigned to anyone who works for them. That means full time employees get W-2 status while any contractors you use are 1099-categorized.
Choosing Between The Two
If you are looking for work or already in employment, you have the opportunity to make the choice between becoming a W-2 member of staff or instead going freelance and using the 1099 form instead.
The former offers more security and comes with added perks, including pension contributions, but has the downside that you will be beholden to the rules, regulations and requirements put in place by your full time employer. The latter gives you more flexibility and freedom, but also comes with instability; furthermore recent changes to taxation could make 1099 status more attractive for certain people.
Employers must also calculate whether hiring W-2 team members or choosing more 1099 freelancers is sensible in their circumstances and industrial contexts. W-2 workers have more of a vested interest in the organization, but may bring additional financial burdens and responsibilities on the behalf of the employer to the table. Having lots of contractors on your books gives you more leeway and the ability to be agile, but means that you do not have the guarantee of worker loyalty and commitment.
In terms of filling out these forms, the payroll department should be able to provide all the relevant information required, and whatever approach you take it is best to be rigorous and accurate to avoid the potential for penalization.
