W-2 vs 1099: What's the Difference Between Employees and Contractors?
When you pay someone for work, one of the first questions is whether they are an employee or an independent contractor. The answer decides which tax forms you file, what you withhold from their pay, and which taxes your business owes.
The short version
| W-2 employee | 1099 contractor | |
|---|---|---|
| Who controls the work | The employer | The worker |
| Taxes withheld from pay | Federal income tax, Social Security, Medicare, state tax | None |
| Employer pays payroll taxes | Yes (employer share of FICA, plus unemployment taxes) | No |
| Year-end form | Form W-2 | Form 1099-NEC |
| Form the worker gives you | Form W-4 | Form W-9 |
W-2 employees
An employee works under your direction: you decide when, where and how the work is done, provide the tools, and usually pay a regular wage or salary. For employees you:
- collect a Form W-4 so you know how much federal income tax to withhold,
- withhold federal income tax, Social Security, Medicare and any state or local taxes from every paycheck,
- pay the employer's share of Social Security and Medicare, plus federal and state unemployment taxes,
- report wages and withholding each quarter on Form 941, and
- give each employee a Form W-2 after the year ends, and send the W-2s to the Social Security Administration (with a Form W-3 transmittal when filing on paper).
Employees also receive a pay stub with each paycheck showing how their pay was calculated.
1099 contractors
An independent contractor runs their own business: they control how the work is done, often use their own tools, may work for several clients, and are paid by the job or invoice. For contractors you:
- collect a Form W-9 with their name and taxpayer identification number,
- do not withhold income tax or FICA (they pay their own self-employment tax), and
- report what you paid them on Form 1099-NEC after the year ends, if the payments are above the IRS reporting threshold for that year.
How to classify a worker
The IRS looks at three areas:
- Behavioral control: does the business control what the worker does and how they do it?
- Financial control: who pays expenses, provides tools, and carries the chance of profit or loss?
- Relationship: is there a written contract, are benefits provided, and is the work a key, ongoing part of the business?
Many states apply stricter tests, so check your state's rules too. Misclassifying an employee as a contractor can lead to back taxes, penalties and interest. If you are unsure, the IRS Form SS-8 process or a tax professional can help.
Forms you can prepare online
On Thi Pay Stubs you can prepare sample versions of the W-2, W-3, 1099-NEC and Form 941 for your records, and fill out the W-4 and W-9 for free. File official forms with the IRS or SSA using the official versions or an authorized e-file provider.