What’s the Difference Between W-2, 1099, and Corp-to-Corp Workers? [Infographic]
The contingent workforce is expanding throughout the US. According to Staffing Industry Analysts (SIA), there were 19.4 million contingent workers in the US in 2022, encompassing 12% of all US workers. This market generated a huge $1.4 trillion in 2022. The trend of companies engaging contingent workers shows no signs of slowing down. Remote work has accelerated the process, leading to organizations rethinking how they get work done to add greater agility in the workplace.
If you are thinking of tapping into the growing US contingent workforce, it is important to understand how to classify contingent workers as they are taxed in different ways and misclassification can result in serious risks and financial penalties for your business.
Types of Worker Classification in the US
There are three main types of worker classification you will come across. These are W-2, 1099, and Corp-to-Corp (C2C). The latter two of these are regarded as independent contractors.
Recruiters new to the US contract market often think engaging independent contractors (C2Cs and 1099s) is a way to ensure agility and flexibility for their workforce. However, W-2 is the most prominent solution used for engaging contractors within the professional services industry, to ensure compliance with classification and the IRS.
This is because all workers in the US are considered to be a W-2 employee unless proven otherwise through an assessment. If you want to engage an independent contractor, you must pass the Internal Revenue Service (IRS) and relevant state/federal tests which we will discuss later in this blog.
W-2 vs 1099 vs C2C Workers [Infographic]
To help aid understanding, we have put together a simple infographic that breaks down the different ways to engage contingent workers in the US.
W-2 vs 1099 vs C2C Workers
What is a W-2 Contracted Worker?
What is a W-2 Contracted Worker?
In the US, W-2 refers to permanent workers or contractors paid at an hourly rate or salary. The term W-2 is derived from the taxation form that is filled in by employees.
In W-2 employment, the employer is responsible for employment taxes, insurances, providing benefits, paid sick leave, and being fully compliant with employment law in the state in which they are operating in.
What is a 1099 Worker?
1099 workers are a type of independent contractor that is unincorporated. They are usually a freelancer or sole proprietor, and are usually engaged by businesses to complete a specific task or project. Similarly, the 1099 term is derived from the tax form filled out by these independent contractors.
As a result, 1099 workers are responsible for their own schedule, calculating and remitting their own taxes, business insurances, and organising their own benefits and 401(k).
What is a C2C Worker?
A Corporation to Corporation (Corp-to-Corp) worker, often abbreviated as C2C, is an independent contractor that is incorporated. Similar to 1099 workers, they are usually engaged by businesses on a project-based contract. The key difference is a C2C worker has their own incorporated company.
The contractor’s business is responsible for all taxes (which are generally higher as they must pay social security and payroll taxes). They are also responsible for benefits and insurances.
Comparing the different types of worker classification
W-2 vs Corp-to-Corp
The video below explains the differences in W-2 vs Corp-to-Corp workers in the US.
W-2 vs Corp-to-Corp - What's the difference?
C2C vs 1099
Corp-to-Corps and 1099s are two different types of independent contractors. The video below explains the differences in C2C vs 1099 workers in the US.
C2C vs 1099 - What's the difference?
Why is it Important to Understand the Difference in the Types of Workers in the US?
It’s important as a business owner to understand the difference between the different worker classifications when engaging workers in the US for a few reasons, namely:
Avoiding financial penalties
The W-2 vs 1099 vs C2C question is an important one to ask yourself when starting to engage workers in the US market. If you engage your worker incorrectly, this can result in worker misclassification. Misclassifying a worker as an independent contractor can result in serious financial penalties from the IRS or an employee misclassification lawsuit against your business.
Tax purposes
The way you classify a worker affects how both your business and how workers are taxed. If you engage W-2 workers you’re required to withhold income taxes and pay taxes on their wages. You don’t usually have to withhold or pay taxes when paying independent contractors, that is their responsibility.
Know where you stand with your worker’s schedule
The way you classify your worker determines how much control you have over their schedule, payments, and job role. For example, 1099’s define when, how, and where they work. If you engage your worker as a W-2, you determine their work schedule.
Is there a US equivalent to IR35?
Is there a US equivalent to IR35?
IR35 is a tax legislation that focuses on determining the employment status of contractors for tax purposes in the UK only. IR35 does not exist in the US. However, the IRS has guidelines to conclude whether a worker is an independent contractor or an employee.
For comparison, workers that would be seen as inside IR35 would be deemed as W-2 contractors, while those outside IR35 would be considered independent contractors.
An extra layer of complexity is added to this topic of worker classification as each state government will have its own criteria for classifying whether a worker is an independent contractor.
W-2 vs 1099 vs C2C: Unsure Where to Start When Hiring Workers in the US? Use an Employer of Record
It can be confusing trying to get your head around the different types of workers in the US when you are trying to grow and establish your business. If you want one less thing to worry about, using an employer of record (EOR) is an easy route to managing compliance for contractor payroll. The EOR will take on the risks and responsibilities related to the back-office payroll services, removing your need to set up a local entity.
Disclaimer: All information here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.