1099 vs W2: pros and cons

Business owners considering the respective pros and cons of using 1099 vs W2 for new hires are missing a fundamental distinction between the two as far as how to use them:

1099	W2
Used for independent contractors who are working with a company on a project-based timeline rather than for the company as a subordinate.	Refers to employees who work for a company, meaning that said company has a greater level of power over what they do and how.

The following sections outline the 1099 vs W2 pros and cons for both employers and workers, providing more clear distinctions for each as well as suggestions for how to proceed.

1099 vs W2: pros and cons for employers

For employers, the question of whether to use a 1099 or a W2 is really the question of whether to hire an independent contractor or an employee. This distinction is at the core of the misunderstanding surrounding whether to use a 1099 vs W2. Pros and cons, however, do still apply in more minute ways:

When hiring independent contractors (1099 workers)

Pros:

• The contractor calculates taxes
• Not required to provide benefits
• No obligation to continue post-contract

Cons:

• Less control over how work is done
• Contractor sets their own price
• Contracts may be more difficult to get out of

When hiring employees

Pros:

• The employee has greater company knowledge
• A greater degree of control
• Lower misclassification risk

Cons:

• Employer is responsible for tax calculation
• Employees are entitled to benefits
• Requires greater adherence to labor laws

We’ve identified four central areas of concern for employers in this decision. The following subsections cover each and provide business owners with valuable direction and advice when staffing their own company.

1. Cost 

Because contractors aren’t protected by labor laws concerning the provision of benefits, minimum wage, or overtime, they often make a more appealing option for business owners, especially when the scope of work is smaller. In the long term, however, they can ultimately become more expensive since they set their own rates, which can be adjusted at the end of the existing contract. 

By contrast, employees typically make a better long-term option since their payment is more directly controlled by the employer, which allows them to set a wage they can budget for overtime. Employees do, however, have greater protections under the law which will make them more expensive to hire for shorter durations. 

1099 vs W2: Costs compared

Criteria	1099	W2
Which is better	✅	❌
Explanation	Although contractors are generally considered to be cheaper due to not being protected by labor laws, there’s not really a “right” option here – consider the scope of work as well as the level of training required for the position. If it appears to be more short-term, chances are that a 1099 contractor is the best option. If long-term, W2 employees are likely your best bet.

2. Legal Risk 

Perhaps the greatest advantage employees have over contractors is the lowered risk of misclassification (i.e., classifying one type of worker as the other), which can have significant penalties for the company depending on where they are doing business. This is especially true for international employers, as some countries like Germany tie IP ownership to classification, meaning that companies can lose control of property that the contractor has worked on. 

Criteria	1099	W2
Which is better?	❌	✅
Explanation	While the reality is that misclassification is bad either way, erring on the side of W2 employees when you are not sure is the best practice since the penalties are significantly less than the other way around. Regardless, consult your legal team or your employer of record (EOR) service before doing either.

3. Control 

One of the central differences between 1099 vs W2s is the level of control that the company has over how a job is performed. Employees must adhere to the instructions of the employer, performing a job when, where, and how they require it. By contrast, contractors are their own business, working with the employer, meaning that these stipulations are determined by them rather than the company.

Criteria	1099	W2
Which is better?	❌	✅
Explanation	Employers with a closer emotional connection to the work being done may consider a W2 employee more advantageous since they can determine the minute specifics of how work is done. While this level of control is not available via contractors, there are cases where a 1099 makes more sense for work that simply needs to get done, regardless of how.

4. Retention & Loyalty

Criteria	1099	W2
Which is better?	✅	❌
Explanation	While it might be tempting to think of employees as having greater retention, the reality is that contractors live and die based on the relationships they maintain with various employers. While it’s certainly possible to have both for long periods of time, contractors are ultimately more likely to consider that relationship sacred.

1099 vs W2: pros and cons for workers

The other half of people curious about the respective pros and cons of 1099s vs W2s are the workers themselves, who are deciding whether it is best to seek employment with a company or go it alone and manage their own business.

When hired as independent contractors (1099 workers)

Pros:

• A greater level of tax deductions
• Greater flexibility over how work is done
• Contracts provide higher job security for the time mentioned in the contract

Cons:

• You are responsible for calculating taxes
• No guarantee of work at the contracts end
• You must provide equipment for yourself

When hired as employees

Pros:

• Taxes are already taken out for you
• Payment includes benefits
• Covered by minimum wage and overtime laws

Cons:

• Less flexibility with deductions
• Less earning potential
• Employer control over how work is performed

The sections below outline the four central concerns of most people making this choice, providing analysis and recommendations similar to those we gave for employers based on our experience as an employer/agent of record.

1. Taxes

Taxation is often the biggest sticking point for workers considering 1099 work, as independent contractors in the US are taxed at approximately twice the rate of standard W2 employees:

1099 vs W2: US tax comparison, 2025

Criteria	Purpose	Who Pays?	Rate (W2)	Rate (1099)
Social Security	Retirement, disability, survivorship	Both	6.2%	12.4%
Medicare	Healthcare for 65+	Both	1.45%	2.9%
FUTA	Unemployment insurance	Employer	0%	N/A
SUTA	State unemployment insurance	Employer	0%	N/A
Workers’ Comp	Injury /disability protection	W2	Varies-Not Required	N/A
Health Insurance	Benefits contribution	W2	Varies-Not Required	N/A
Total			~7.65%	~15.3%

While W2 employees pay less in taxes every year, it is also important to note that 1099 contractors have the ability to deduct expenses related to their business. This includes elements like: 

• Home office construction
• Travel
• Equipment
• Legal/professional fees
• Business insurance

For contractors willing to go through a more exhaustive tax process every quarter — freelancers pay quarterly — this can potentially result in a more advantageous tax situation than what is possible with a W2.

Criteria	1099	W2
Which is better	✅	✅
Explanation	Although independent contractors have the opportunity to make significantly more money from their taxes through various deductions, the amount of work required to do so often makes it less appealing for the majority of people considering it. By contrast, the simplified tax setup for W2 employees often leads workers to choose it.

2. Benefits

1099 contractors get the freedom of being their own boss. However, that freedom places them squarely in charge of their finances, similar to that of a small business owner. This means they are not eligible for benefits like health insurance or a 401k the same way that employees are. 

Criteria	1099	W2
Which is better	❌	✅
Explanation	W2 employees are able to get benefits through their job, making it not only easier to manage but also significantly cheaper than it is for 1099 contractors to buy their own.

3. Flexibility

In inverse proportion to the amount of control that an employer has over the worker is the worker’s flexibility. This is the central quality that W2 employees trade off in exchange for simpler taxes and benefits, as they must perform the job as instructed by the employer.

Criteria	1099	W2
Which is better	✅	❌
Explanation	1099 contractors work with the employer, not for them. This means that they set their own schedule in accordance with the contract as agreed upon by both members, with otherwise complete control over their own working hours, preferred means of communication, and completing the work.

4. Job Security

Job security becomes a complicated topic when discussing 1099 vs W2. Pros and cons exist in both categories, since W2 employees are protected to some extent by federal and state law while 1099 contractors are covered by their contract. 

Ultimately, the distinction breaks down by duration; during the contract, contractors have a greater degree of protection as per the termination clause. For a more long-term position, however, employees’ superior knowledge of the company or product over time makes them more valuable and important to keep.

Criteria	1099	W2
Which is better	✅	✅
Explanation	W2 employees are generally thought of as having a greater deal of job security due to the protections granted to them by federal labor laws. However it is important to consider that many states use at-will employment, meaning a W2 employee can be let go at any time for any reason. 1099 contractors, by contrast, are protected by termination clauses in their contract that outline specific circumstances under which employment can be ended.

Can someone get both a W2 and a 1099? 

Yes, as long as the roles in consideration are distinct and legally separate. 

For example, a W2 employee working for a company on the weekends as a cashier is approached by management to install a new anti-virus software on the company computers. Since this job is not in the W2 employees current job description, they opt to “hire” them as an independent contractor paying them a separate set of wages for a different set of work. 

When it comes time to file taxes, the employee would file their W2 earnings on line 1 of Form 1040, while they report 1099 earnings on Schedule C. 

Need help deciding between 1099 & W2? 

We understand it’s not always clear what the best option is. If you are still unsure how to proceed, we suggest speaking with an expert to lay out your options clearly. Payoneer WFM has worked with thousands of businesses to optimize their global hiring.

FAQs

1. What are the tax benefits of being a 1099 worker?

As a 1099 worker, one can deduct business-related expenses like home office costs, equipment, and travel. This can reduce their taxable income. 1099 workers have more control over their tax planning, though they must pay self-employment taxes.

2. What are the benefits of hiring a 1099 worker?

Hiring 1099 workers offers flexibility, lower costs, and fewer administrative requirements. Employers don’t pay benefits or withhold taxes, and contractors can be hired for short-term or specialized projects as needed.

3. Does the employer withhold taxes for a W-2 employee?

Yes, employers are required to withhold federal and state income taxes, Social Security, and Medicare from a W-2 employee’s paycheck. They also contribute to unemployment insurance and other payroll taxes.