W-2 vs 1099

W-2 vs 1099 is shorthand for the most consequential classification in US work: employee or independent contractor. A W-2 employee has taxes withheld, employer-paid payroll taxes, and the protection of wage, leave, and anti-discrimination laws. A 1099 contractor is a business of one: no withholding, no overtime, no workers' compensation — and full responsibility for their own taxes.

How classification is decided

The label on the contract does not decide anything; the working relationship does. Several tests are in play at once:

• IRS common-law test: behavioral control, financial control, and the nature of the relationship.
• DOL economic-reality test: whether the worker is economically dependent on the business or genuinely in business for themselves, for FLSA purposes.
• State ABC tests: California and others presume employee status unless the worker is free from control, works outside the company's usual business, and runs an independent trade.

A worker can be a contractor under one test and an employee under another — state tests are often the strictest.

Why it matters for shift teams

Someone you schedule on a recurring roster, supervise on site, and pay hourly to do your core work is very likely an employee under any test. Misclassification brings back taxes, unpaid overtime, and penalties at federal and state level — accuracy here beats convenience every time.

IRS common-law rules (Rev. Rul. 87-41); FLSA economic-reality test (US DOL); state tests such as California's ABC test (Labor Code § 2775, Dynamex).

Related terms

• Payroll taxes
• FLSA
• Workers' compensation