Deel: Guide to Getting Paid as a 1099 Contractor vs. W-2 Employee
By: Shannon Hodgen, Deel
If you’re considering converting from a W-2 employee to a 1099 contractor (or vice-versa), you should know how it affects your payment experience. Read this guide to learn more.
The number of independent contractors in the US has grown steadily over the past ten years, reaching 51 million in 2021. If, like many others, you’re considering the option of converting from a W-2 employee to a 1099 contractor (or the other way around), you want to factor in how, when, and what you’ll be paid.
Getting paid as an independent contractor is quite different from getting paid as an employee. You have more control over your fees and processes, but you also have more responsibilities and tax obligations.
In this article, you’ll learn the differences between being a 1099 contractor and a W-2 employee, how it impacts your pay experience, and what to expect come tax season.
1099 contractor vs. W-2 employee: What’s the difference?
The terms 1099 contractor and W-2 employee refer to the tax forms used for each type of worker. To record and report income, independent contractors get 1099-MISC tax forms, and employees get W-2 tax forms.
What is a 1099 contractor?
A 1099 contractor is a non-payroll worker hired by a company to provide services on a contract basis. They are self-employed independent contractors, freelancers, and gig workers. A 1099 contractor is typically hired for a specific project or short-term work.
A company that hires a 1099 contractor is the contractor’s client, not their employer. Contractors can work with multiple clients simultaneously, define their own hours and fees, and use their own equipment. The employer has no control over the contractor’s process or methods, only the outcome of their work.
Employers do not provide employee-type benefits such as health insurance, worker’s compensation, unemployment insurance, and paid time off to 1099 contractors.
Each year, contractors get 1099-MISC slips from their clients. Clients use this IRS document to document payments made to an independent contractor. These slips help contractors record and report their business income on their tax returns. Learn more in our guide to 1099 contractors.
What is a W-2 employee?
A W-2 employee is a payroll employee who gets paid a standard wage, has set hours, and receives employee benefits and other forms of compensation. Employers have much more oversight of W-2 employees, controlling their processes, equipment, and output.
A W-2 employee can be a part-time or full-time employee and has the right to the minimum wage set by federal and state laws. When you’re a W-2 employee, your employer withholds income tax, Social Security tax, and Medicare tax from your pay.
Each year, employees get a Form W-2 Wage and Tax Statement from their employer. The W-2 reports an employee’s income for the previous year and the taxes that have been withheld from their pay. The document is required for the employee to file their tax return.
Read our article on the differences between Form W-2 and Form 1099 to learn more.
Advantages of being a 1099 contractor
Advantages of being a W-2 employee
|You control how many hours of work you do per week and can take off time as desired without needing approval||You have a fixed schedule (it’s easier for workers with children to schedule child care when they have a consistent work schedule)|
|You choose what clients and projects you take on||You receive benefits and perks such as health insurance, PTO, dental insurance, life insurance, retirement plans, and more|
|You have more business expenses to write off come tax season||You gain financial stability—you don’t have to worry about where your next paycheck will come from|
|You have fewer meetings and don’t have to commute to an office||You have opportunities for learning and development (internal courses, mentorships, education incentives, and team experiences)|
Before you begin: Do you meet the criteria of a 1099 contractor?
If your employer is asking you to convert from an employee to a contractor, or you’re considering two different career paths, find out if becoming a contract worker is a legally valid option for you.
Contractor roles can be considered misclassified if your role and responsibilities actually fit the criteria of an employee. If you’re unsure whether you should be classified as a contractor or employee, compare your role with the following guidelines the IRS uses in labor disputes:
- Behavioral: What degree of control do you have over your work? How do you do your job?Example: If you wake up on a Wednesday and decide to take the day off or want to work from somewhere other than your usual office space, and you don’t need approval from your employer, you’re likely considered a contractor. If your employer dictates your hours, work location, and day-to-day process, you more so fit the criteria of an employee.
- Financial: Are the business aspects of your job controlled by your employer? How are you paid, reimbursed, or provided equipment?Example: Contractors fund their own work equipment and supplies (laptop, phone, programs, etc.) while employers provide that equipment or reimburse employees for their purchases.
- Type of relationship: Is the working relationship permanent? Do you have an employment contract or employment-type benefits? Is the work you perform a core business need?Example: You’re likely an employee if you receive paid time off and health insurance, or if you’ve signed a long-term contract that has an exclusivity clause or non-compete clause.
Learn more about the differences between being an employee and a contractor.
Access your money, when you need it
If you’re paid through Deel, you can receive your salary up to 30 days early, without insane interest rates, confusing T&C’s, or late repayment fees.
How a 1099 contractor gets paid
Contractors are actually considered business owners—you’re your own boss. So getting paid as an independent contractor will be very similar to how businesses pay each other—using invoices.
Getting paid as an independent contractor typically involves requesting payment via invoices and receiving payment within a defined payment period. Here’s a closer look at the step-by-step process.
1. Creating an invoice
First, the contractor creates a digital or paper invoice that includes:
- Business information (business ID, address, etc.)
- Contractor contact information
- Client contact information
- Services completed
- Amount due
- Payment terms
- Preferred payment methods
Read our guide on how to invoice a client as an independent contractor to learn more and access a free invoice template.
2. Sending your invoice
The contractor then sends the invoice to the client via email or through a digital platform. The contractor should receive payment within the amount of time outlined in their invoice or contract. If you don’t receive payment from your client within your defined window, here’s how to professionally ask for payment.
Some companies use automated services to pay their contractors, which works well for contractors that get paid the same amount on a regular basis. Companies using Deel can hire, pay, and manage contractors all on one platform.
3. Payment methods
As an independent contractor, you set the terms of how you’re paid. Payment methods can range from cash and cheque to direct deposit or bank transfers. Read our guide on payment methods for independent contractors for more information.
4. How much does a 1099 contractor get paid?
As a 1099 contractor, your income will depend on how much work you do, what you charge, and how you bill. For example, you may bill per project and receive one large lump-sum payment. If you charge by the hour and bill weekly, you may receive several smaller-sum payments.
Importantly, the payments you receive won’t have taxes deducted from them—this affects your taxes at the end of the year. You may also collect sales tax depending on your business and your location.
5. Payment schedules
Your payment schedule will depend on the terms of the contract agreement. For example, if you’re hired for a short-term project, you might make payment due upon completion.
Some contractors require deposits throughout the project life cycle. A typical deposit schedule is 50% upon contract signing and 50% upon project completion. If a contractor provides ongoing services, such as bookkeeping, they might invoice their client weekly, bi-weekly, or monthly.
Learn more about the payment process by reading our guide on getting paid as an independent contractor.
What taxes do 1099 contractors pay?
Tax compliance tends to be more challenging for 1099 contractors than W-2 employees.
As business owners, 1099 contractors must pay income tax (based on their income level) and self-employment tax. Self-employment tax comprises Social Security and Medicare taxes, similar to the FICA tax withheld from a W-2 employee’s pay. You can determine your self-employment taxes using Schedule SE (Form 1040) from the IRS.
Additional state or municipal taxes may apply depending on which state you live in. Some states—such as Washington and Texas—don’t charge personal income tax.
Read our overview of paying taxes as an independent contractor to learn more.
1099 tax rate
The self-employment tax rate is divided into two parts: Social Security tax (old-age, survivors, and disability insurance) is 12.4%, and Medicare tax (hospital insurance) is 2.9%. In total, self-employment tax is 15.3% of your income.
Unlike employees, eligible 1099 contractors may claim the following expenses as tax deductions:
- Home expenses: Rent, phone, internet, mortgage interest, real estate or property taxes, home security, and more
- Office and business expenses: Stationery supplies, equipment, office repairs and maintenance, and utilities
- Travel and car expenses: Rideshares to meetings, client meals, airfare, and parking
- Business development: Advertising, licenses, insurance, and other business investments
Learn more about the tax deductions independent contractors can claim.
How a W-2 employee gets paid
As a W-2 employee, getting paid is a straightforward process that tends to require much less work than getting paid as an independent contractor.
1. Payment setup
During a typical employee onboarding process, employers will request banking information from their new hires so they can transfer their weekly or monthly pay to them with ease.
Your employer may request a void check, which includes all the necessary banking information but can’t be cashed. Or, they may request direct deposit information such as your bank account number, routing number, type of account (checking or savings), bank name and address, and names of the account holders.
2. Payment method
Your payment method will depend on the agreement you have with your employer. You may receive a physical paycheck, a bank transfer, or a direct deposit.
3. How much does a W-2 employee get paid?
Your hourly wage or salary should be stated in your employment contract. Your employer will deduct taxes from your paychecks in accordance with your state’s tax laws.
Salaried employees will receive the same amount of pay in each paycheck unless they receive additional monetary compensation such as a bonus, commission, or overtime pay. If you’re paid by the hour, your paycheck will vary depending on the hours you worked during your pay period.
4. Payment schedule
W-2 employees are paid on a consistent schedule that’s determined by their employer. Payroll is typically completed on a bi-weekly basis, but weekly or monthly payments are also common in some countries. W-2 employees will receive a pay stub on payday that states their income earned during the pay period and the amount of taxes withheld.
What taxes do W-2 employees pay?
Employers are responsible for withholding income tax and payroll tax from their employees’ paychecks. Payroll taxes vary depending on the state and can include:
- Federal Income Withholding Tax
- Federal Insurance Contribution Act (FICA)
- State Income Tax Withholding/Employee’s Contributions for SSI
- State Unemployment Tax (SUTA)
- Federal Unemployment Insurance Taxes/Employer’s Contributions for FUTA
W-2 employee tax rate
In the US, employers and employees pay four federal payroll taxes at the following rates:
- Social Security Tax: 12.4% total (half paid by the employee, half paid by the employer)
- Medicare Tax: 2.9% of employee earnings (half paid by the employee, half paid by the employer)
- Unemployment Tax: 6% on the employee’s first $7,000 earned, paid by the employer
- Income Tax: Varies depending on employee’s wages
Learn more about W-2 forms and tax deductions.
Although W-2 employees can’t write off as many expenses as an independent contractor, they can still claim some deductions:
- Standard deduction: You may qualify for a standard deduction by simply filing your taxes. In 2021, the standard deduction was $12,550 for a single filer and $25,100 for filing jointly as a married couple
- Itemized deductions: Includes the cost of medical and dental expenses, state and local taxes, and charitable donations
- 401(k) plan: Contributing your own money to your 401(k) reduces your taxable income. In 2021, the contribution limit was $19,500 or $26,000 if you’re over 50 years old
- IRA: Contributing to an IRA provides you with a tax deduction. You can contribute up to $6,000 into a traditional IRA or $7,000 if you’re over 50 years old
- Child tax credit: Applicable to taxpayers with children under the age of 17 who are claimed as dependents (restrictions apply)
Estimate your take-home pay with a calculator
If you’re considering a new role as a W-2 employee, you’ll want to know what your take-home pay will be. Take-home pay is the income you receive after taxes are deducted from your pay. Luckily, you don’t have to do the math yourself.
Using Deel’s Take Home Pay Calculator, select your country, payment period (annually or monthly), and salary to see your take-home pay. You’ll get a breakdown of the estimated taxes deducted from your pay and can refine your results to see your net annual, monthly, or semi-monthly income.
What’s best for you? It’s a personal decision
Understanding how you get paid as a contractor or an employee is one part of your decision. Your personal values, like your career goals or work-life balance, will also play a role. No matter which path you take, consider Deel as your payment resource.
Businesses using Deel can hire, manage, and pay contractors and employees easily and compliantly. With our global payment solution, you can pay your entire team in just one click, automate payslips, and take tasks like tax calculation and legal compliance off your plate.
Disclaimer: This article is informational and so should not be considered tax advice. Consult with a tax advisor or ask an accountant or CPA for help.
This article was originally published for deel.com