Benjamin Franklin once said that nothing in this world is certain except death and taxes. From the teenager working a part-time job to the CEO of a multi-million dollar organization, every working American—whether full-time, part-time, hourly, salary, self-employed, or a gig worker—must pay taxes to the Internal Revenue Service (IRS) and respective state tax agency.
Those taxes are income tax (both federal and state), Social Security, and Medicare taxes (often called FICA). Some states may also require local or city taxes based on where you live. The IRS takes payment of taxes very seriously. Ask anyone why April 15 is important, and most people can tell you it's tax day—the day you must file your tax return or risk paying penalties.
Simply put, our tax return tells the IRS how much we earned during that tax year and how much we already paid in taxes. Based on that, they can calculate whether we overpaid or underpaid our taxes. If we overpaid, we get a refund. If we underpaid, we must pay the IRS for the amount we were short.
1099 Contractor vs. W-2 Employee
The IRS expects you to pay taxes on your earnings throughout the year. That's done based on what type of employee/worker you are. There are generally two types—1099 contractor and W-2 employee.
W-2 Employee Meaning
If you were hired by an organization as a W-2 employee, your income, Social Security, Medicare, and any state taxes are automatically deducted from your paycheck based on a formula given to your employer by the IRS and a W-4 Form you complete when you are hired. You will see these deductions on your pay statement.
The W-2 employee definition is based on the W-2 Form sent to employees at the end of each year, which shows how much money you earned and how much was deducted in taxes for the entire year. This form is used to complete your annual tax return.
1099 Contractor Meaning
If you are self-employed or a 1099 contractor, meaning you receive a 1099 form for work you performed and invoiced, there are no deductions made to the amount you are paid. You are responsible for paying the IRS your income, Social Security, and Medicare taxes on your own.
The IRS requires that these payments be made quarterly, and missed payments will incur a penalty. If you are a 1099 contractor, you can determine the amount you will owe each quarter by using the IRS Form 1040-ES.
Is it better to be a 1099 or W-2 employee?
While being either a 1099 or W-2 employee has pros and cons, here are five reasons why the W-2 employee benefits outweigh being a 1099 contractor, and why choosing to be a W-2 employee will save you a lot of time while supporting your overall well-being by reducing tax stress. Plus, it will save you money on taxes in the long run.
1. Spend Less Time (and Worry) on Tax Paperwork
People often feel stress and anxiety when completing their tax returns. A key stressor is completing all the paperwork correctly. Another is worrying that you owe the IRS because you underpaid your taxes.
1099 contractors must keep careful records. If you are a contractor for multiple organizations throughout the year—meaning you get paid from several different companies—you will have to calculate your total income each quarter, then calculate the amount of taxes you owe. If you don't pay enough each quarter, you will have to pay the total amount owed when you file your tax returns. You will also be hit with an underpayment penalty. If you forget to pay one quarter, you will also be hit with an underpayment penalty, regardless of whether you double your payment the next quarter.
W-2 employee tax deductions are calculated automatically, deducted from your regular paycheck, and sent to the IRS by your employer – there is nothing you need to do or remember. You will also not pay a penalty for missing a payment.
Your year-end W-2 Forms are also available electronically. If you file electronically through a service like Turbo Tax, the W-2 can usually be imported directly from your employer's payroll service, cutting down on costly errors.
2. Save Money on the Self-Employment Tax
Remember those three taxes all earners pay—income tax, Social Security tax, and Medicare tax? Employers are required by law to pay half of the Social Security and Medicare taxes for W-2 employees. 1099 contractors must pay the entire tax themselves. This is referred to as the self-employment tax. Because of the self-employment tax, 1099 contractors pay more taxes than W-2 employees.
3. Payment Security
There is nothing worse for a 1099 contractor than sending out your invoice and waiting to get paid. And waiting, and waiting, and waiting. Some companies will pay the invoice immediately. Some pay within 30 days. Some may take a few months to pay. While you can add late payment fees, you are still at the mercy of a short-staffed and/or overworked team that must approve and submit the invoice. Then you have to wait for the finance team to pay it. Your bills can't wait for their late payments. As a W-2 employee, your payment becomes part of your employer's automated payroll system. You get a paycheck based on that schedule, either every week, every other week, or twice a month.
4. Employment Security
Labor laws favor W-2 employees, who are given protections including minimum wage, workman's compensation, overtime protection, and unemployment benefits. 1099 workers don't have any of those protections and must save on their own in case they are hurt on the job or suddenly become unemployed. W-2 employees are also often entitled to participate in company benefits like health and dental insurance. 1099 workers must find—and pay for— insurance on their own, which is costly.
5. Proof of Stable Income
When you apply for a loan, whether it is a mortgage, car loan, student loan, or credit card, the application asks to verify your income. As a W-2 employee, your income is simple to verify—you just show your financial services lender your last two pay statements. This is more difficult for 1099 contractors. You can share your invoices, but that income isn't always viewed as stable by lenders. 1099 contracts change all the time. It's harder to show a consistent payment history.
ShiftMed Hires Healthcare Professionals as W-2 Employees
ShiftMed connects CNAs, STNAs, GNAs, LPNs, and RNs with nearby per diem shifts or permanent positions at short-staffed facilities through the ShiftMed app.
When choosing ShiftMed to find nursing jobs, we hire you as a W-2 employee of ShiftMed. You can work at multiple facilities or the same provider as often or as little as you would like and get paid as a ShiftMed employee. You will also become part of a community of healthcare providers working for one organization that allows you to work where and when you want without the hassle of invoicing and tracking 1099s from different facilities.
If you have questions about your own unique tax situation, speak with a tax professional, who can explain the benefits of being a 1099 contractor or W-2 employee.
If you're not already a ShiftMed employee, what are you waiting for? Download our app to start doing the work you love when and where you want.
Disclaimer: ShiftMed does not provide legal, accounting, or tax advice. This content is for informational purposes only and is not intended to provide legal, accounting, or tax advice. Please refer to a professional advisor prior to acting on the information set forth herein.