1099 vs W-2: What Contract Status Means for Remote Workers

If you apply for remote work in the United States you will see two numbers that describe two very different relationships: W-2 and 1099. They are the names of tax forms, but in practice they tell you whether you are an employee or running your own small business.

W-2: employee

On a W-2 job the employer withholds income tax, pays its share of Social Security and Medicare, and usually offers benefits such as health insurance, paid leave and a retirement plan. In return it can direct how, when and where you work. At year end you receive a W-2 form showing your wages and the tax already withheld.

1099: independent contractor

On a 1099 contract no tax is withheld. You are responsible for income tax and self-employment tax, which covers both halves of Social Security and Medicare. You normally pay estimated tax during the year rather than waiting until April. In return, you control how you do the work, can hold several contracts, and can deduct legitimate business expenses. Clients that pay you over a threshold send a 1099 form at year end.

What this means for comparing offers

• A 1099 rate needs to be higher than a W-2 wage to come out equal, because of self-employment tax and the missing benefits.
• 1099 work suits people who want flexibility or several clients; W-2 suits people who want stability and benefits.
• Hours on 1099 contracts are usually not guaranteed.

If you're outside the United States

International contractors working for US companies are usually not issued a 1099. Instead you may be asked to complete a W-8BEN form, which confirms you are not a US taxpayer, and you pay tax where you live under your own country's rules. Some platforms act as an intermediary and handle the paperwork. Our guide to how remote contractors pay taxes covers the general picture.

A simple comparison

Imagine two offers for similar work: $48 an hour on a W-2 with health cover and paid leave, or $60 an hour on a 1099 with nothing else. On the 1099 you pay the employer's half of Social Security and Medicare yourself, buy your own insurance and fund your own time off. Depending on your situation, the $60 can end up close to the $48 — or clearly ahead if you would not use the employer's benefits anyway.

The comparison only makes sense in full-year terms. Estimate annual hours for each, subtract the costs you would carry on the 1099, and add the benefits' value to the W-2. Then compare.

Records a 1099 contractor should keep

• Every 1099 form received, and payments from clients who don't send one.
• Receipts for business expenses such as equipment and software.
• Dates and amounts of estimated tax payments.