With tax season upon us, it would be nice to review the differences between W-2 employees and 1099 independent contractors so that everyone (companies and talent alike) can find their correct classification and make adjustments in the future. If you’re a freelancer filing taxes, maybe for the first time, you’ll need to know the distinction, too!
What does it mean to be a W-2 worker?
When you think of a traditional, full-time employee, you're probably thinking of a W-2 employee. By definition, a W-2 employee is someone who works directly for a company and receives a regular paycheck with taxes automatically withheld. Employers deduct income taxes, Social Security, and Medicare taxes and often contribute a matching amount. Many W-2 employees also receive benefits such as health insurance, 401(k) plans, paid leave, and more.
What is a 1099 Independent Contractor?
On the other hand, when you think of a freelancer, you're probably thinking of a 1099 contractor. A 1099 worker is an independent contractor or freelancer who provides services on a project-by-project basis. Clients pay these workers in full, without withholding taxes. As a 1099 contractor, you’re responsible for paying quarterly estimated taxes, which cover self-employment tax, Social Security, and Medicare. If you are a freelancer, always factor taxes into your rates when billing clients. Likewise, clients hiring freelancers should understand what they pay for freelance labor includes taxes.
Key Differences Between W-2 and 1099 Employees
1. Taxes:
- W-2 employees have taxes automatically withheld by the employer.
- 1099 contractors are responsible for paying all their own taxes on income, including items like Social Security, self-employment, and Medicaid.
2. Benefits:
- W-2 employees normally receive company-provided benefits such as health insurance, paid time off, and retirement plans.
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With the 1099 classification, benefits are not typically provided and you are responsible for finding and paying for your own medical plans, retirement funds, etc. Companies hiring independent contractors save money by not providing benefits.
3. Work Flexibility:
- W-2 employees are required to work within the bounds set forth by an employer’s work schedule, company culture, and more.
- 1099 contractors will have greater autonomy in choosing the projects they work on and setting their own work parameters while working with clients.
Tax Preparation Tips for Freelancers & Independent Contractors
To set yourself up for success (especially if you are a 1099 worker), here’s how to stay organized and avoid tax surprises:
- Know your deadlines:
- March 15: LLC business tax deadline
- April 15: Personal tax deadline
- Track income and expenses: Maintain a detailed account of all income and expenses. Invest in accounting software like Quickbooks, Wave Apps, or HoneyBook to keep track throughout the year.
- Understand deductions: Reduce your taxable income by understanding your business-related expenses like software, office space, equipment, and internet costs. If you need help with what these expenses could look like, we have a great article for you!
- Pay quarterly taxes: Check your state's tax website for due dates. 1099 employees are the only ones who need to do this. Don’t incur any penalties, so be sure to pay them on time!
- Work with a tax professional: If you’re freelancing, it’s important that you find a CPA near you who is familiar with 1099 tax laws. W-2 tax professionals are fairly easy to find as most CPAs are familiar with the tax laws of salaried individuals.
TLDR; While every year might be different for you in your career, it takes a full year of knowing your classification and keeping your financial files organized. Understanding the difference between W-2 employees and 1099 contractors can also help you make informed decisions about your career or your hiring needs. Make use of helpful software (especially if you’re a freelancer) to make paying your quarterly and annual taxes a headache-free experience. Whether you’re a company, a freelancer, or a full-time employee, you’ll be helping your future self if you start planning now for next year’s tax return.
If you are a company looking for creative talent or are a freelancer seeking work, Artisan can help! We are a boutique talent agency that specializes in matching top creative professionals with the right companies. Let’s work together to make dream job placements come true!
