W-2 or 1099? How the Way You’re Paid Changes Your Taxes (and Benefits)
Every year, filing your taxes feels like stirring an alphabet-and-number soup of forms. It’s hard to keep track of them all, but the most common forms seem to be the W-2 and the 1099. You know they reflect different classifications related to your taxes and income, but you’re not exactly sure what those differences mean.
The differences are important. They reflect how you get paid for your work, what you owe the IRS and even the benefits you receive. MoneyLion is here to give you the need-to-know information about the differences between a W-2 and a 1099.
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Your Employment Status Determines Everything
The biggest difference between someone receiving a W-2 or a 1099 involves their employment status. ADP’s SPARK blog describes a W-2 employee as someone on an organization’s payroll, typically hired for an indefinite period to complete ongoing work.
What It Looks Like To Be a W-2 Employee
On its SPARK blog, ADP goes into more detail about what being a W-2 employee means for your taxes:
“Taxes are withheld from their checks and remitted to the state and federal government as required,” it wrote. “Organizations also pay employment taxes and make Social Security and Medicare contributions for W-2 employees. These workers are also eligible for legal protections and benefits such as overtime, health insurance and more.”
ADP also lists some common examples of W-2 workers:
Hourly employees in labor, customer service and similar roles
Salaried employees who complete daily tasks required by the organization
Executives and management throughout the organization
What It Looks Like To Be a 1099 Worker
The ADP team says that 1099 workers typically run their own enterprises, often balancing multiple clients.
“They take care of their own costs of doing business and are responsible for reporting and paying taxes on their income,” the team wrote. “They don’t have access to employment-related legal protections or receive employment-related benefits from those who hire them.”
Wondering what a 1099 worker looks like? ADP has you covered with some examples:
Freelance talent such as writers, photographers and graphic designers
Consultants offering a one-time or limited scope of service
Gig workers who complete tasks or projects, sometimes using online platforms or apps
Contractors who may be hired through temp agencies or other vendors
On the surface, the main difference between a W-2 and a 1099 worker seems to be that age-old conflict between the stability of being a regular employee and the freedom of being your own boss. But it also affects who handles payroll taxes and whether taxes are withheld from your pay.
Tax Withholdings Work Differently
W-2 forms typically show how much money you’ve earned from your employer during the year, enabling you to calculate your adjusted gross income. These forms also show your tax withholdings from your employer, including federal and state taxes.
The team at TurboTax breaks this down very simply: “Essentially, the W-2 gives you a sense of how much you were paid and how much you’ve already submitted to the IRS and your state in taxes.”
Conversely, the 1099 form (or forms — “1099” is a family of tax forms used to report different types of income) shows the income you’ve earned outside a traditional employee paycheck — including income you’ve earned as an independent contractor or from another source.
As TurboTax explains: “If you’re a freelancer or own your own business, you’ll likely receive several 1099 forms from your clients. The IRS requires businesses to issue a Form 1099 if they’ve paid you at least $600 that year.”
In other words, your 1099 forms often won’t show taxes you’ve paid to the government — because, in many contractor arrangements, there’s no automatic withholding — just the income you’ve earned. That means you’re responsible for making estimated payments and paying self-employment tax.
Quarterly Estimated Taxes Can Help 1099 Workers Avoid Surprises
Speaking of those estimated payments, here’s a reminder: If you’re a 1099 worker who should be paying quarterly estimated taxes but doesn’t, you’re likely to get one hefty tax bill in April — and may risk penalties and fees. The IRS divides the year into four estimated-tax payment periods, each with its own due date.
Since you don’t have an employer withholding taxes for you, the IRS expects freelancers to pay as they earn. The filing dates are April 15, June 15, September 15 and January 15 — or the next business day if the 15th falls on a holiday or weekend.
Many tax experts suggest that 1099 workers set aside 25% to 30% of every payment to cover taxes.
The Bottom Line
There are some significant differences between W-2 wages and 1099 income, and we’re not just talking about seeing a few extra letters on your form. The form you receive has a meaningful impact on how you approach your tax strategy, from withholding and payroll taxes to whether you need to make estimated payments throughout the year.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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