As the workplace has evolved, so has the type of workers it brings on. Most people have heard of independent contractors, especially as the gig economy has grown. According to ADP Research, the monthly count of independent contractors rose from 300,000 in 2019 to 450,000 in 2025, a 50% increase. This growth means companies that traditionally relied on W-2 employees are now looking at the advantages of 1099 workers, also known as independent contractors, freelancers, or gig workers. The differences between these worker types can be confusing, and the penalties for misclassification only add to the pressure. This guide breaks down 1099s and W-2s so you know which applies to your situation.
This post is intended for informational purposes only, and should not be taken as tax, accounting, or legal advice. Laws may vary by state or location. For specific advice pertaining to your business, please consult a CPA, tax, or legal professional.
TLDR:
- 1099-NEC goes to contractors paid $2,000+ per year. W-2 goes to employees whose taxes you withhold.
- The IRS looks at three things: who controls the work, who controls the money, and whether the relationship is ongoing with benefits.
- Misclassifying workers can mean back taxes, penalties, and unpaid benefits; the IRS audits this.
- Switching from W-2 to 1099 can cut per-worker costs by 20 to 30%.
- Routable handles contractor payouts at scale: W-9 collection, TIN/EIN validation, 1099 filing, and payments across 220+ countries.
What Is a 1099?
A 1099-NEC form is a tax form sent to contractors who work for themselves if they are paid $2,000 or more during the tax year. Examples of independent contractors include delivery drivers, freelance writers, and platform creators. A few exceptions apply, such as payments made to C-corporations or S-corporations. There are also 1099-K forms for payments made through credit cards, third-party transactions, and other methods.
1099: The Basics
As your gig workforce scales, your platform will handle tax withholdings much differently than traditional employers. A 1099 worker is considered an independent worker and often hired on a contract basis for specific tasks. How they interact with your marketplace and what work they do are defined within that contract, and both can vary depending on the role you need filled. The form exists because independent contractors are responsible for withholding their own employment taxes. They work for themselves, not for your company.
When Is a 1099 Appropriate?
From the IRS perspective, independence and degree of control over the employee determine whether a 1099 or W-2 is more appropriate. While this is up to interpretation, the IRS website covers three key items to consider which employee type is more appropriate.
Behavioral
Does the company control, or have the right to control, what the worker does and how the worker does his or her job?
For a 1099 worker, their independence is often confirmed through the contract you sign with them upon hiring. Usually, they don’t have nearly the amount of instruction as a regular employee, as they only create a product or provide a service by a certain deadline. This structure means they often work where and when they want to and are not usually trained by the company.
Financial
Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
The financial test can be the trickiest to assess. Independent contractors often pay for all of their equipment, such as a home office, and are more likely to have unreimbursed expenses. Contractors are also free to work with multiple clients at once and typically don’t receive a guaranteed hourly or weekly wage.
Type of Relationship
Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?
These freelance workers often have a contract stating they are an independent contractor, and these deals often don’t include employee benefits. Contractor engagements are typically project-based with no expectation of long-term employment, and the work usually falls outside your company’s core operations.
What Is a W-2?
A W-2 form is required for all typical business employees and shows an employee’s salary information along with federal and state income tax withholdings.
W-2: The Basics
Any time you onboard an employee and withhold income, Social Security, or Medicare taxes, you’re required to file a W-2 for them. This form is also known as the Wage and Tax Statement, and it’s used to report FICA taxes for employees throughout the year.
When Is a W-2 Appropriate?
Unlike 1099 contractors, a W-2 is the right classification when the worker operates with less independence from your organization. For instance, these workers often follow company policy regarding hours and where they’re allowed to work. They typically receive benefits such as health insurance and are given all the equipment they need to do their job. The role is typically ongoing, and the worker receives regular paychecks on a set schedule.
Hourly vs. Salaried W-2 Employees
Within the W-2 classification, you can hire workers on an hourly or salaried basis. Hourly employees, often classified as non-exempt, are paid for the exact amount of time they work. You must track their hours closely, as federal and state laws mandate overtime pay (usually time and a half) if they work more than 40 hours in a workweek. Common examples of hourly W-2 roles for platform operators include driver support specialists, marketplace trust and safety moderators, and shift-based logistics coordinators, where schedule coverage directly impacts daily operations.
Salaried employees receive a fixed amount of pay on a regular schedule, regardless of how many hours they work in a given week. These workers are frequently classified as exempt from overtime, provided their role and compensation meet certain legal thresholds. While salaried roles offer predictable payroll costs, you pay for the completion of the job, not the time spent doing it. Typical use cases for salaried W-2 employees include marketplace product managers, platform engineers, and creator success directors. These roles are based around strategy, continuous platform growth, and long-term business goals.
How Independent Contractors Differ From Employees
Sometimes, your platform may need an expert to help with a specific task or project. For example, you might need an independent developer to build a custom integration for your marketplace. In that case, hiring them as a contractor is often far more practical than bringing them on as a full W-2 employee with set hours, full benefits, and a permanent workspace. If you know you will need this worker on a very temporary basis or sporadically, it can be beneficial to both parties to come to a different agreement through a contract.
Unlike employees, contractors typically work under a short-term agreement that spells out the legal terms of the engagement. Employees work under a company policy that is often more strict in specifying how the organization expects them to do their work; however, they also receive benefits and usually have a long-term planned position within the company. Employees, by contrast, have income taxes, including Social Security, withheld by their employer each pay period.
Choosing Employees or Contractors
There are pros and cons to scaling your workforce with contractors over employees. For a growing marketplace, independent contractors are a practical option for fulfilling on-demand services because they withhold their own taxes. Because you are not required to manage their payroll taxes or pay them benefits, relying on contractors creates structural financial savings. Platforms often save 20 to 30% per worker when switching. If you’re considering that path, Routable’s W-2 to 1099 conversion guide covers the legal, financial, and practical steps involved. Contractors typically need little direction and bring their own tools and resources.
That said, investing in a full-time employee can pay off over time, building institutional knowledge and loyalty that a contractor relationship rarely provides. You have more control over employees, while you only have the rules outlined in the contract with an independent contractor. Legally, things are more complicated when hiring a freelance worker as workers’ compensation does not cover them, and you may not be able to fire them at will depending on the contract, along with other technicalities.
Overall, the best worker classification for your platform depends on your growth model and the specific work at hand. Whether you run a high-growth marketplace or are scaling a gig workforce for the first time, the IRS guidance website is a reliable starting point. They also have an SS-8 form or Determination of Worker Status form that you can fill out if you are still unsure, though the IRS notes these can take at least six months to receive a determination. When in doubt, reaching out to an employment expert is always a good idea.
Pay Your 1099 Contractors With Routable
Once you’ve confirmed a worker is a 1099 contractor, the next challenge is paying them accurately and on time, especially when your contractor headcount starts to scale. Routable is built for exactly that. Whether you’re running biweekly payouts to dozens of gig workers or disbursing to thousands of contractors across the country, Routable handles the payment execution, tax form collection, and compliance in one place.
Routable collects W-9s automatically during contractor onboarding, validates TIN and EIN information against IRS records, and generates 1099-NEC and 1099-MISC forms at year-end, so your team isn’t scrambling every January. Payments go out via ACH, same-day ACH, real-time payments, check, or wire, and contractors can see exactly when and how they’ll be paid. If you work with international contractors, Routable covers 220+ countries in 140+ currencies with 30 to 50% savings on foreign exchange rates compared to most competitors.
You can start with a simple approach to paying 1099 contractors and expand to a fully API-driven mass payout workflow as your contractor network grows. Either way, Routable keeps the financial and tax side of contractor relationships off your plate.
Request a demo to see how Routable handles contractor payouts at scale.
FAQ
How do I determine whether a worker should be classified as a 1099 contractor or a W-2 employee?
The IRS uses three factors to guide the decision: behavioral control (does your company control how the work is done?), financial control (does the worker set their own rates, provide their own equipment, and take on unreimbursed expenses?), and the type of relationship (is the work project-based with no benefits, or ongoing with health insurance and a set schedule?). If the answer to most of those questions points toward independence, a 1099 classification is likely appropriate. When you’re genuinely unsure, you can submit IRS Form SS-8 to request an official determination, though responses typically take at least six months.
What are the risks of misclassifying a W-2 employee as a 1099 contractor?
Misclassification can expose your company to back taxes, penalties, and interest on unpaid payroll taxes, including the employer’s share of Social Security and Medicare that should have been withheld. Workers who were misclassified may also become eligible for back pay of benefits such as health insurance and unemployment coverage. The IRS and many state agencies actively audit worker classification, so getting it right from the start matters more than fixing it later.
How much can my company save by using 1099 contractors instead of W-2 employees?
Companies often save 20 to 30% per worker when switching from W-2 employees to 1099 contractors, since you’re not responsible for payroll taxes, benefits, workers’ compensation, or unemployment insurance. The exact savings depend on your industry, the benefits package you’d otherwise provide, and how much equipment or workspace you’d supply. Keep in mind those savings come with tradeoffs: less control over how and when work gets done, and more limited ability to build institutional knowledge over time.
When should I use the IRS SS-8 form?
File Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) when you’ve reviewed the behavioral, financial, and relationship factors and still can’t confidently classify a worker. Either the business or the worker can submit it, and the IRS will issue a formal ruling on the correct classification. Just plan ahead: the IRS notes these determinations take at least six months, so it’s not a quick fix for an urgent hiring decision.
What is the difference between an hourly and salaried W-2 employee?
Hourly W-2 employees are paid based on the exact amount of time they work and are typically eligible for overtime pay under federal and state laws. Salaried W-2 employees receive a fixed amount of compensation on a regular schedule, regardless of the hours worked, and are often exempt from overtime pay if they meet specific legal thresholds. Both types receive W-2 forms and have taxes withheld by their employer.