W-2 Employee or 1099 Contractor
Whether you are an employee or a contractor is not a preference the parties get to select — it follows from how the work is actually controlled and performed. The classification determines who bears payroll tax, what you may deduct, and which labour protections apply. Businesses sometimes prefer contractor treatment because it is cheaper for them, which is precisely why the classification is scrutinised.
Who this affects
- Anyone offered work 'as a 1099' rather than on payroll
- Small businesses engaging help for the first time
- Workers whose duties look identical to colleagues on payroll
- Korean-owned businesses in the US engaging staff
Control is the deciding factor
The tests look at behavioural control, financial control and the nature of the relationship — who sets the hours, who supplies the tools, whether the worker can profit or lose, whether the arrangement is open-ended. A contract calling someone a contractor does not settle it.
Contractor status shifts the payroll tax onto you
An employer pays half of Social Security and Medicare for a W-2 employee. As a contractor you pay both halves as self-employment tax. A contractor rate that merely matches the equivalent salary is a pay cut once that is accounted for.
Misclassification is the business's exposure, not just the worker's
Where a worker is treated as a contractor but functions as an employee, the engaging business can face back payroll taxes and penalties. This is a common and expensive finding for small businesses that grew informally.
The deduction picture is genuinely different
Contractors deduct ordinary and necessary business expenses against their income. Employees generally cannot deduct unreimbursed work expenses in the same way, which is part of why the two arrangements are not interchangeable.
Common questions
My employer wants to switch me to 1099. Can they?
Only if the working relationship genuinely changes to match. Relabelling identical work usually amounts to misclassification, and the exposure sits mainly with the business.
What contractor rate matches my salary?
More than the salary figure. You need to cover the employer half of payroll tax plus any benefits and paid leave you are giving up, before the comparison is fair.
I think I have been misclassified. What now?
There is a formal process for asking the IRS to determine worker status, and it has consequences for both sides. Getting advice before initiating it is sensible.
Official sources
General information, not tax advice. Rules and thresholds change, and how they apply depends on your circumstances — confirm with a licensed professional before acting.