The distinction between classifying someone as a W-2 employee versus a 1099 independent contractor has significant implications for taxes, liability, and benefits — and getting it wrong creates real legal and financial exposure.
The Basic Difference
W-2 employees are workers whose taxes are withheld by the employer, who receives a W-2 at year end. The employer pays employer-side FICA taxes, may be required to provide workers' compensation, and has more control over how and when work is performed.
1099 contractors are self-employed individuals responsible for their own taxes. They receive a 1099 at year end, and the client (your business or a client's business) does not withhold taxes or pay employer-side FICA.
Why This Matters for Placing Consultants
The IRS and many states have specific tests for determining whether someone is truly an independent contractor or should be classified as an employee. Misclassification — treating someone as a 1099 when they should be W-2 — can result in back taxes, penalties, and liability for unpaid benefits.
For HR consultants placing people on longer-term engagements, with client control over work schedules and methods, W-2 classification is typically the safer and more appropriate structure.
What This Means at HR2HR
The compliance structure of your placements — including how consultants are classified — is built into the HR2HR partnership from the start. You don't need to navigate the W-2 vs. 1099 question yourself; it's handled as part of the operational infrastructure we provide.