What Is a W-2 Employee?
A W-2 employee is a traditional employee on your payroll. You withhold federal and state income taxes, Social Security, and Medicare from their paycheck and pay the employer share of payroll taxes. At the end of the year, you issue a Form W-2 that summarizes their wages and taxes paid.
- Employee is on payroll and receives regular paychecks
- Taxes are withheld automatically from each paycheck
- Typically eligible for employee benefits (health insurance, PTO, retirement plans)
- Employer controls how, when, and where work is performed
What Is a 1099 Independent Contractor?
A 1099 contractor is a self-employed individual or business you pay for services. You generally don't withhold taxes from their payments. If you pay them $600 or more in a year, you normally issue a 1099-NEC reporting those payments.
- Paid as a vendor or contractor, not as payroll
- No tax withholding – they handle their own estimated taxes
- Not eligible for employee benefits
- Contractor controls how the work is done and often works with multiple clients
Control, Independence, and the IRS Tests
The IRS looks at multiple factors when deciding if a worker is truly a contractor or should be treated as an employee. No single factor is decisive – it's about the full relationship.
Behavioral Control
Ask yourself:
- Do you tell them exactly how to do the work, or just what result you need?
- Do you set their schedule, or can they choose when they work?
- Do you provide detailed training and supervision?
The more control you exercise over how work is done, the more likely the worker is an employee rather than a contractor.
Financial Control
Consider the financial side:
- Do they invest in their own tools, equipment, or software?
- Can they make a profit or loss based on how they run their business?
- Do they invoice multiple clients, or only you?
Contractors typically run their own business, take on financial risk, and work with multiple clients.
Relationship of the Parties
Look at the overall relationship:
- Is there a written contract describing them as a contractor?
- Do you provide employee-style benefits?
- Is the relationship open-ended or project-based?
Tax Implications for Employers
Hiring W-2 employees means you're responsible for payroll taxes and withholding. Hiring 1099 contractors shifts the tax burden onto the contractor, but only if they truly meet the contractor tests.
- W-2 employees: You pay half of FICA (Social Security and Medicare) and handle withholding.
- 1099 contractors: You generally don't withhold taxes. They pay self-employment tax on their own.
Misclassifying employees as contractors can lead to back payroll taxes, penalties, and interest. That's why it's critical to get this right.
Which Is Right for Your Situation?
For ongoing roles where you control the schedule and work, W-2 status is usually safer. For specialized, project-based work with independent professionals, 1099 status may be appropriate.
When in doubt, talk to a payroll professional or tax advisor. The cost of proper classification is almost always lower than the risk of IRS or state audits.
How MakePaystubPro Fits In
MakePaystubPro helps you generate professional documentation for both W-2 employees and 1099 workers:
- W-2 employees: Create paystubs that mirror what's reported on Form W-2
- 1099 workers: Generate paystubs based on actual payments for loan, rental, or income verification
- Dedicated generators for W-2 forms and 1099-NEC forms
We don't decide worker classification for you, but we give you the tools to document income professionally once you've made that determination.