The 1099 versus W2 line

How it works

The IRS looks at three areas: behavioral control, meaning whether the business directs how, when, and where the work is done; financial control, meaning who provides tools, whether the worker can make a profit or loss, and whether the worker serves other clients; and the relationship, meaning written contracts, benefits, and whether the work is a key part of the business. A contract calling someone a contractor does not settle it. An employee has income tax and half of payroll tax withheld, with the employer paying the other half and often providing benefits. A contractor receives gross pay on a 1099, pays the full 15.3 percent self employment tax, makes estimated payments, and can deduct business expenses on Schedule C. A worker who believes they were misclassified can ask the IRS to decide by filing Form SS-8.

What it gives

A contractor can deduct business expenses, open a SEP or solo 401(k), and set their own hours.

An employee has taxes withheld, half of payroll tax paid by the employer, and access to benefits and unemployment insurance.

The IRS test is published, so both sides can read the same factors.

What it costs, or where the catch is

A contractor pays both halves of payroll tax and gets no employer benefits, so the same gross pay is worth less.

A business that misclassifies employees owes back payroll taxes and penalties.

A contractor has no unemployment insurance and usually no workers' compensation if hurt on the job.

A worked example

Anjali is offered $60,000 as a W2 employee or $66,000 as a 1099 contractor for the same work. As an employee she pays 7.65 percent payroll tax, about $4,590, and the employer pays the same. As a contractor she pays self employment tax of $66,000 times 0.9235 times 0.153, about $9,325, with half deductible, and buys her own health insurance for $5,400 a year. After those two items the contractor offer nets about $51,275 before income tax, against $55,410 as an employee.

Where it goes wrong

The common miss is a worker accepting a 1099 arrangement for a job with set hours, a supervisor, and company equipment, and discovering the whole payroll tax bill is theirs in April.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: Independent contractor, self employed, or employee. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.