1099 vs. W2 Workers: What's The Difference?

In today's workforce, there are two main types of workers: 1099 and W2. Knowing the differences is vital for job seekers, freelancers, and businesses.

As a cryptocurrency payroll provider catering to diverse needs, Bitwage recognizes the importance of clarifying this!

What is a W2 Employee?

W2 workers are mostly employees in a formal employment relationship with a US company. They receive a regular or hourly salary from their employer. Usually, the employer is the one responsible for providing supplies, equipment, tools, and a place for them to work.
The employer is also in charge of giving the employees non-monetary benefits. Some of these benefits are mandatory while some are additional perks employers give to retain their workforce.

Pros

Let's take a look at some benefits and disadvantages of W2 workers 👇

Retention
The benefits involved in W2 formal employment can help create a better quality workspace, thus attracting and retaining employees while increasing morale. When looking at staff, the more quality benefits you provide your workers with, the more likely they will stay with you for a long time.

Control
This benefit is mainly for employers since they can check employee schedules, and choose which course of action and tasks employees are working on, while also dictating possible growth for said employee.

Commitment
Employees on a per-project basis don't think much about the impact of their work on the company. W2 workers are more committed to creating and working on things that align with company spirit.

Cons

More expensive
W2 workers are by nature more expensive than 1099 workers. Employers are required by law to pay certain benefits, taxes, and healthcare. Training is not cheap either, if your worker is required to join a boot camp before joining the company, that must be paid as well.

Legal Complexities
As a W2 worker, your employer does most of the legal work required while the employee is more protected compared to 1099 workers. Employee disability and must also pay FICA, FUTA, and SUTA taxes.

W2 Worker Taxes

Tax Withholding
Employers are required, by law, to withhold Federal, State Income, Social Security, and Medicare taxes from employees' paychecks. This is a rather simple task since employees' taxes are automatically deducted from their paycheck.

Employer Contributions
Normally, employers contribute half of the Social Security and Medicare taxes that W2 workers are required to pay. While the other half is deducted from the employee's paycheck.

Employee Benefits
W2 employees may be eligible for some additional benefits. Health insurance, retirement plans, and paid time off to name a few. These benefits also have tax implications, and some of these benefits can also provide tax deductions and credits.

Tax filing
Filling taxes as a W2 employee is, in most cases, really straightforward compared to 1099 workers, since most of the tax-related paperwork is provided by the employer. This includes a W2 form detailing income and taxes that are withheld.

What is a 1099 worker?

1099 workers are often referred to as independent contractors. They work on a project basis and are not considered employees. Usually, a 1099 worker is a self-employed worker who completes certain jobs or assignments. Since 1099 workers are not deemed employees, you, as a business, do not have to pay them a wage or a salary. You instead agree on pay and terms that suit both parties and the 1099 worker creates invoices once terms or workload has been reached. There are no specific payment methods required, both parties can decide on what's best.

Pros

When it comes to staffing, researching what the best solution for you or your business is, can be the key to saving time, money, and effort.
Here are a few things to consider 👇

Flexibility
Liberty when it comes to hiring new workers or terminating workers based on company needs. This is especially helpful when it comes to companies on the rise or tech companies who are constantly adapting to market needs.

Cheaper
As an employer, generally speaking, hiring a 1099 can be cheaper. You don't have to provide the same benefits as W2 workers. You are not required to pay half of their taxes either, they pay all of their taxes themselves.

Less work
Since 1099 workers are paid through invoices, it can greatly reduce the workload on your HR team.

Cons

Integration
In the current remote work era, 1099 workers can have difficulty when it comes to integrating them into your current team. Language barriers, time zones, and other aspects can become a challenge. Take these into account when researching for your staffing solutions.

Loyalty
By nature, W2 workers are more likely to fully represent the spirit of your company. While 1099 workers could have a harder time.

Control
Unlike W2 workers, 1099 workers are much harder to control. You don't really know what they are doing behind the scenes, or what their daily schedule looks like. Look into tools, or approaches, that could help you analyze work being done by 1099 workers of your business.

1099 Worker Taxes

Self-employment taxes: Unlike W2 employees, 1099 workers are responsible for paying the full amount of taxes when it comes to Social Security and Medicare. These are known as "Self-Employment taxes" and they amount to 15.3% of their income (USA).

Quarterly estimated taxes: Different from W2 workers, 1099 workers do not have taxes withheld from their paychecks. As a 1099 worker, you are required to make quarterly estimated tax payments to the IRS.

Tax deductions: An advantage that 1099 workers have over W2 workers is the ability to deduce business expenses from their taxable income. This includes, but is not limited to, travel costs, home office costs, and work-related supplies. The IRS lets you deduct half of the required self-employment tax (7.65% of the 15.3% required). Which in turn lowers your taxable profit with the more deductions you can claim.

Tax filing complexity: Tax filing for these types of workers is a bit more complex. No employer at bay who will do the tax work for a 1099 worker. Instead, 1099 workers need to track and report business expenses, income from diverse sources, and comply with self-employment tax regulations.

Below you can see a breakdown of the main tax implications of 1099 and W2 workers

Bitwage and Taxes

Bitwage, as a non-custodial crypto payroll platform, does not get involved when it comes to taxes. Businesses all over the world can use Bitwage while complying with tax laws.

For W2 workers, Bitwage services are post-tax, which means that employers use their current payroll service provider and deduct taxes before Bitwage pays the worker.

For 1099 workers, the individual or business sends the pre-tax payment to Bitwage, and the 1099 worker is required to do their taxes diligently.

Bitwage does not hold employee or employer funds, Bitwage as a non-custodial service, simply facilitates employers and employees with the ability to receive part of their pay in the desired currency, be it local currency, Bitcoin, or altcoins.

Forget about problems like what happened with Silicon Valley Bank back in 2023, where the Silicon Valley Bank was shut down after investments decreased greatly in value and depositors withdrew large amounts of money from the bank. Many individuals and companies alike, held funds within Silicon Valley Bank and lost those funds with the bank being shut down. Bitwage does not hold your funds, we receive funds from employers and immediately send them to the corresponding worker.

Conclusion

While both 1099 and W2 workers contribute to the workforce, there are various pros and cons involved with each. When it comes to taxes, for example, 1099 workers are more flexible, yet they face higher obligations and complexities. On the other hand, W2 workers benefit from having taxes automatically deducted from their paychecks and some may have employer-provided benefits.

At Bitwage, we believe that understanding each worker type and tax implications is crucial for businesses hiring workers from abroad.

-Thanks for reading!