In the US (and with similar parallels globally), workers fall into two buckets. Knowing which one you are is critical for avoiding tax fraud and understanding your financial obligations.
W2 (The Employee)
- Who: The company controls when, where, and how you work.
- Taxes: Withheld automatically from your paycheck by the employer.
- Invoicing: You do NOT send invoices. You receive a payslip.
- Benefits: Typically receive health insurance, 401k matching, paid time off.
1099 (The Contractor)
- Who: You control your own schedule, methods, and tools.
- Taxes: You pay your own taxes later (nothing is withheld). You're responsible for quarterly estimated tax payments.
- Invoicing: You MUST send invoices to get paid.
- Benefits: None from the client. You're responsible for your own insurance and retirement.
The Self-Employment Tax Surprise
As a 1099 worker, you pay BOTH the employee AND employer share of Social Security and Medicare. That's 15.3% on top of income tax. This is why many new contractors are shocked at their first tax bill—they didn't realize they'd owe 25-35% of their gross income.
If you are a 1099 worker, you are a business owner. You need to use an Invoice Generator to bill your clients professionally and keep meticulous records for tax time.