Two broad categories of workers that most people are familiar with are 1099 independent contractors and W-2 employees. The main differences concern taxes and benefits, and it is important that you understand which one applies to you. For example, understanding the distinction can help ensure your employer pays you any required overtime compensation. Here we take a closer look at these two types of workers.
1099 Versus W-2
Companies must properly classify any individuals who perform labor for them. The most commonly used categories are the 1099 contractor and the W-2 employee. The numbers 1099 and W-2 are based on the tax forms the respective workers receive and which are filed with the IRS. The 1099 worker is sometimes known simply as a contractor or independent contractor, while the latter is more generally called an employee.
1099 workers/independent contractors are not full-fledged employees of the company because they are self-employed, their work is usually temporary, and they perform work that is outside the scope of what the company usually does. For example, a business that doesn’t do any sort of accounting work may hire a forensic accountant on a 1099 basis to trace money that was embezzled by a former employee.
Independent contractors are not generally entitled to the same benefits as employees, such as participation in retirement plans and health insurance coverage through the company. The business also does not have to withhold taxes or make tax payments on the 1099 worker’s compensation. The independent contractor has the duty of paying all their own taxes.
Meanwhile, a W-2 employee is usually simply called an employee. The W-2 is a yearly tax form the employer must give the employee and send to the IRS. It reports such information as the identity of the employee, his or her annual wages, and the amount of taxes withheld.
Advantages and Disadvantages of Hiring 1099 Workers Versus W-2 Employees
To further understand the differences between 1099 workers and W-2 employees, consider why an employer might want (or not want) to hire both types:
Advantages of 1099 workers
- They are independent and do not require a long-term commitment by the company
- They can apply specialized knowledge to complete a unique task that the company’s employees are not equipped to handle
- No need to withhold taxes or offer traditional employment benefits like health insurance
- Easier to hire and terminate
Disadvantages of 1099 workers
- It is easy for a company to misclassify an actual employee as a 1099 contractor, which could subject the business to legal penalties
- The company exercises far less control over the contractor’s work than over the employees
- Can be disruptive to constantly have to hire and fire contractors
Advantages of W-2 employees
- Employees are generally more committed and loyal to their employers because they value the financial stability of consistent employment
- Employees can often perform multiple types of jobs and be shifted from one task to another
- Employers have greater control over their employees and can guide and direct their work
Disadvantages of W-2 employees
- The employer must pay Social Security and Medicare taxes on the employee and provide various employment benefits, all of which are more costly
- Unlike contractors, who bring their own tools and supplies to a job, an employee must be provided with everything they need to do their jobs
- In general, the employer must invest in the employee (e.g., by training them) but there is no guarantee the employee won’t eventually leave and even work for a competitor
How the Differences May Affect Overtime
Bearing in mind the key differences between 1099 workers and W-2 employees, how might the distinctions affect overtime pay?
To begin with, it’s important to understand the basics of overtime pay. Under the federal Fair Labor Standards Act (FLSA), employees who work more than 40 hours in a given week are entitled to overtime pay, unless they meet one of the government’s rigidly defined exemptions. Most hourly employees are entitled to overtime, which is paid at the rate of 1.5 times the worker’s regular hourly rate for each hour over 40 in a week. There are also state and local overtime rules which often require greater compensation to employees than the FLSA.
Importantly, the FLSA and state and local overtime rules usually only apply to employees, not to independent contractors. This is why it is vital to understand the differences between 1099 workers and W-2 employees. If you are actually an employee but you’ve been misclassified as an independent contractor, you might be missing out on overtime pay and other employment benefits.
If you’ve been labeled an independent contractor and any of the following apply to you, there’s a good chance you may actually be an employee who is entitled to overtime pay:
- The company directs and controls your work, such as deciding your hours of work
- The company provides the tools that you use
- Your earnings are set
- You provide services that align with what the company does
- You have not financially invested in the type of services you provide
- You have a traditional employee relationship with the company
Are You Not Getting Paid the Overtime You Deserve?
If you’ve been incorrectly classified as a 1099 worker (ie. misclassified) when you should be treated as a W-2 employee, you could be entitled to overtime pay and other benefits. Or perhaps you are not sure and want some guidance. Either way, reach out to The Lore Law Firm to learn more about your rights. You can receive a free review by filling out our confidential online client intake form.