If you’re a job seeker or a business hiring in the US, you’ve likely heard of W2 employment. But what is it? What is a W2 employee?
Understanding the different types of employment is crucial for both employers and employees. Why? This helps both parties to fulfill their tax responsibilities and find the right fit for the role.
For employers, this also helps them determine what kind of benefits, compensation, and work hours to offer when it comes to hiring new W2 employees.
Whether you are an employer looking to hire or an employee seeking stability, this comprehensive guide will provide you with the knowledge you need to navigate the world of W2 employment.
This comprehensive guide will delve into the details of W2 employment. We will explore what it is, how it works, and what it means for employers and employees.
W2 Employment: An Overview
From forms for income taxes and working hours to how to hire W2 employees, here’s everything you need to know.
What is a W2 Employee?
Officially, there are seven types of employment in the US.
According to the Fair Labor Standards Act (FLSA) in the US, the seven types of employment are:
- Full-time: Employees with a permanent job duration and an annual salary of at least $35,568.
- Part-time: Employees who work less than 30 hours weekly are paid hourly. These roles are prevalent in retail, restaurants, warehouses, and sales.
- Contract: Employees hired and work for a set period of time for less or more than 40 hours weekly as outlined in a signed contract.
- Independent Contractor: Similar to contract employees, independent contractors work to complete projects at an agreed pace and are not on payroll. These positions are more flexible. Common roles in this employment classification include freelance writers and rideshare drivers.
- Temporary: Employee hired on a short-term or seasonal basis. This type of employment can be part-time or full-time. Typical roles in this employment type include ski lift operators or housekeeping.
- On-call: Employees hired to work at specified work hours. They could be on-site or called in when needed. Examples of this role include caregivers and customer service representatives.
- Volunteer: These roles are usually unpaid and vary in time commitment, usually at public institutions or non-profit organizations such as animal shelters.
Where does W2 employment fit into all this? W2 employment means full-time employment by a company or employer. W2 refers to a specific wage and tax statement, or form, used in the United States.
Exempt V.S. Non-Exempt Employees
Here is something employers and employees should note when looking for or hiring for a job. What is the difference between an exempt and a non-exempt employee? Or a W2 employee and an independent contractor?
An exempt employee is not guaranteed benefits like minimum wage and overtime pay by the FLSA, but they can get benefits from their company, like healthcare, paid time off, and a 401(k).
They're paid a salary that stays the same no matter how many hours they work or what they do. Their job duties are often executive, professional, or administrative in nature.
W2 employees are usually exempt employees unless stated otherwise in their contract.
A non-exempt employee can get FLSA benefits and company policies, like working from home and flexible work hours. The FLSA does not limit their working hours, and they're paid hourly unless classified as salaried non-exempt.
Part-time and temporary employees are usually classified as non-exempt employees, such as independent contractors.
To determine this distinction, the role of an employee can be examined by three tests:
- Salary Basis Test: This checks if an employee gets paid a set amount every week without changing based on hours worked.
- Salary Level Test: This test checks if an employee is getting paid at least $684 weekly.
- Job Duties Test: This checks if an employee does jobs that qualify for an exemption, like professional, executive, and administrative jobs.
What is a W2 Tax Form in the US?
US employers use this Internal Revenue Service (IRS) tax form to report wages, tips, and other compensation to employees and the taxes withheld from those payments.
The form includes social security tax and records of contributions to other benefits such as health plans or retirement savings plans for W2 employees.
This is in addition to a W2 employee’s earnings and is typically provided to employees by the end of January following the end of the tax year, so employees can file personal taxes themselves.
This tax form does not apply to non-US contractors or freelancers.
How can I get a W2 Tax Form?
Each year, employers must provide W2 employees with a copy of their W2 form by January 31st. If employers fail to provide W2 employees with this information, they can obtain a copy from the Internal Revenue Service through a request process.
There are multiple copies of the W2 form for W2 employees, their employers, and the IRS.
If a W2 employee has multiple employers, they will receive multiple W2 tax forms and can file their W2 in the additional fields section. It is uncommon to receive multiple W2 tax forms from the same employer unless the business was acquired.
For American citizens overseas, incomes are still taxed. It is one of the only two countries that taxes overseas income. Additional forms must be filled out to file payroll taxes for foreign income earned outside the US. This includes Form 1040, FBAR (FinCEN Form 114), and FATCA Form 8938.
If you are a non-American employee working in the US, you may receive an additional tax form called the 1042-S form. You need to report this when you are filing your taxes. If you are working remotely and outside the US for a US company, you will need a W8BEN or W8BEN-E tax form and pay taxes in your home country. It is also helpful to check if there is a tax treaty between the US and your home country to avoid double taxation.
W2 Employees vs. 1099 Employees: What’s the Difference?
1099 employees are independent contractors and freelancers who are not on a company’s payroll. Indeed, the main difference between W2 and 1099 employees is that W2 employees are considered full-time company employees, while 1099 employees are considered independent contractors.
This means that employers don’t have to pay payroll taxes or provide benefits for W2 employees. On the other hand, 1099 employees are responsible for their own income tax and benefits.
Being a W2 employee comes with various benefits, such as insurance, 401k plans, paid time off, and other forms of compensation.
If you’re looking for a job, understanding the difference between W2 employees and 1099 employees is key. W2 employment is usually the best option if you’re looking for job security, benefits, and stability.
However, if you are looking for flexibility, 1099 employment may be better suited. The flexibility of freelance work could also mean the potential for higher earnings for some.
How Does W2 Employment Work?
W2 employees are entitled to certain benefits and protections under US law.
These are non-monetary compensation such as health insurance, paid time off, unemployment, and workers' compensation insurance. While this is common in the US, it may not apply to every country.
Not sure what benefits W2 employees should get from their company?
Here’s a list of common mandatory examples:
- Unemployment insurance based on W2 employee earnings
- Federal minimum wage of at least $7.25
- Overtime for W2 employees who work more than 40 hours a week
- Unpaid leave under the Family and Medical Leave Act (FMLA)
- Workers’ compensation for medical expenses, lost wages, and death benefits for dependents when a work-related fatality occurs
- Continued group health insurance coverage for up to 18 months under Consolidated Omnibus Budget Reconciliation Act (COBRA) when you work or own a company of over 20 employees
- Withholding FICA taxes which cover Medicare and Social Services
- Retirement plans such as IRAs and 401(k)s
What about optional benefits? Here’s another list:
- Additional health, dental, and insurance
- Fertility benefits
- Mental health care and wellness programs
- Disability insurance
- Sabbatical
- Flexible work hours and remote or hybrid arrangements
- Education or Skills reimbursement and assistance
Benefits of W2 Employment
In addition to employer-sponsored benefits and committed employees for employers, there are various benefits for both employees and employers.
Employee Benefits
W2 employees benefit from stability and security. However, in uncertain times, security is hard to guarantee regardless of whether you are a W2 employee. Nonetheless, W2 employees usually have long-term contracts with their employers.
The long-term nature of W2 employment also allows W2 employees to grow professionally by gaining experience and developing their skills. On top of growth, W2 employees benefit from increased legal protections and job-protected paid and unpaid leave.
Employee Disadvantages
Some disadvantages for W2 employees are the lack of freedom or flexibility in tasks and work hours. While W2 employment provides stability and security (to a certain extent), employers have more control over employees’ working hours and conditions.
Employees may not have the chance to develop skills they want to, choose their benefits if not negotiated before employment starts, or work in areas that spark their interest.
Work-life balance could also be affected, and salary increases may be hard to achieve in a set timeframe, which is why job hopping has become such a phenomenon. In fact, six out of ten millennials are open to new job opportunities!
Employer Benefits
When hiring W2 employees, employers benefit from being able to control working hours and conditions. Employers also benefit from continuous employment. By employing workers for the long run, employers can ensure continuity in projects or quality of work and build a strong company culture. Employers can also gain from employee loyalty. From a more productive workforce to improved innovation, these are some benefits of W2 employment.
In addition to productivity and loyalty, employers only need to train W2 employees once instead of training contractors again and again. This saves employers time. W2 employees can also cost employers less because they cannot set their own rates. With stable costs, employers can also make long-term business decisions and invest in employees. W2 employees can help lower costs and save time.
Employer Disadvantages
When hiring W2 employees, businesses cannot scale as quickly as needed. W2 employees are a high cost to business, as high as 70%! Remember, for companies of certain sizes, employers must continue to provide group health insurance to laid-off W2 employees.
This makes it hard to scale your business to your needs. Unlike independent contractors, you cannot just hire W2 employees for a project or according to your budget. There is less flexibility and scalability.
Legal protection for W2 employees makes this even harder and increases the paperwork burden. Meanwhile, 1099 independent contractors are less of a legal risk since they are not eligible for W2 employee benefits.
Is a W2 Employee Better for Your Business?
Now that we’ve listed some pros and cons of W2 employment, the real question is whether a W2 employee is better for your business. Is a W2 employee better for your business’ bottom line? From costs, the amount of control over working hours and type of work to continuity, there is lots to consider.
What do you want your business to look like? What is your final product? These are all important questions to consider when making this hiring decision.
While it may seem that you only pay for the staff you need when you hire an independent contractor and manage less, there may be changes in the quality of work you get since contractors can take on as many projects as they want.
Furthermore, if you are trying to build a strong company culture, continuity in employment is key.
To make this hiring decision easier, consider these factors:
- Duration and frequency of projects
- Specialization
- Final product
- Business reputation and company culture
- Budget and training
- Flexibility and scalability
- Paperwork, legal, and tax responsibilities
- Level of management
Frequently Asked Questions
What are medicare taxes?
Medicare taxes, also known as "hospital taxes", is a federal employment tax. These federal employment taxes are used to fund a portion of the Medicare insurance program. Similar to social security tax, Medicare taxes are withheld from a person's paycheck directly.
Nearly everyone who works in the United States is required to pay Medicare taxes, including W2 employees.
What are social security taxes?
Social Security tax is a form of tax that is levied on both employees and employers. It is used to fund the Social Security Program in the United States. It's collected in the form of payroll tax, automatically deducted from an employee's paycheck.
Social security taxes are mandated by the Federal Insurance Contributions Act (FICA) or a self-employment tax mandated by the Self-Employed Contributions Act (SECA).
What does W-2 stand for?
The W-2, which is officially called wage and tax statements, is a federal income tax report that creates a summary of earnings that were earned by employees. W-2 is used in calculating taxes and other taxes.
Hire W2 Employees and 1099 Independent Contractors with Borderless
To sum up, W2 employment is a fundamental aspect of the workforce, with the wage and tax statement (W-2 form) serving as a critical document. It's particularly relevant when comparing W2 employment to independent contractors when it comes to determining income tax.
When individuals are classified as W2 employees, their employers are responsible for managing employee tax withholdings and employment taxes, including income and Medicare taxes, which are reported on the W-2 form. The Internal Revenue Service (IRS) relies on these forms to ensure accurate reporting and collection of payroll taxes.
On the other hand, independent contractors handle their own employment taxes. They often pay payroll taxes on their taxable income independently. Understanding the distinctions between these classifications is crucial for workers and employers to ensure compliance with tax regulations and manage their financial obligations effectively.
Understanding W2 employment is essential for both employers and employees. By grasping the intricacies of W2 employment, individuals can make informed decisions about their career path and obligations for income taxes.
Other options include hiring through a temporary agency, a professional employer organization (PEO), or an Employer of Record (EOR) like Borderless.
No matter your hiring decision, Borderless is here to help you onboard, retain, and pay W2 employees and 1099 independent contractors no matter where they are in the US and abroad.
Payroll looks a little different for both, and you can leave it to Borderless to focus on the bigger things that matter to your business. Grow your team in the US and in 170+ other countries. Catch Borderless in action.
