The contingent workforce is expanding rapidly across the US. According to the U.S. Government Accountability Office report, 40% of the U.S. workforce consists of contingent workers, with businesses employing 18% of their workforce on a contingent basis. The trend of companies engaging contingent workers in the US shows no signs of slowing down. Remote work has accelerated the process, leading businesses to rethink their work patterns and resulting in greater agility in the workplace.
If you are considering tapping into the growing US contingent workforce, it is essential to understand how to classify contingent workers. Each classification is taxed differently, and misclassification can result in serious legal risks and financial penalties for your business.
Types of Worker Classifications 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.
Recruitment agencies 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 remains the most prominent solution used for engaging contractors within the professional services industry to ensure compliance with federal, state, and local classification requirements.
Under US law, workers are generally presumed to be W-2 employees unless the hiring party can demonstrate that the worker meets the legal criteria for independent contractor status. Suppose you intend to engage an independent contractor. In that case, the worker must satisfy tests established by applicable local, state, and federal authorities, including the Internal Revenue Service (IRS) and the federal Department of Labor’s (DOL) independent contractor rule.
In 2024, the DOL issued a final rule, updating its assessment position for determining whether a worker is an IC or an employee. In May 2025, they announced that the department is currently reviewing this final rule, as it is being challenged in federal court. Agency investigators have been instructed not to apply the 2024 rule’s analysis in current enforcement matters, although private employers should continue to use this rule.
What is a W-2 Worker?
A W-2 worker is a traditional employee engaged through an employment relationship with an employer, regardless of what the relationship is called. W-2 workers are the most common type of worker classification in the US, even in the contract staffing market. The name “W-2” refers to the IRS form that employers are required to issue to employees annually for tax reporting purposes.
In a W-2 employment relationship, employer responsibilities include, but are not limited to:
- Processing payroll following legally mandated pay schedules, minimum wage laws, and overtime rules
- Withholding employment taxes (income tax, Social Security, Medicare)
- Maintaining required insurances, including workers’ compensation
- Providing employee benefits in compliance with applicable laws (such as healthcare plans under the ACA)
- Providing paid sick leave and other leave entitlements in eligible jurisdictions
- Complying with applicable federal, state, and local labour and employment laws
What is an Independent Contractor?
An independent contractor is defined by Compliance HR as a self-employed individual or organization contracted to perform work or provide services as a non-employee. Independent contractors are not covered by most of the same laws that are in place for the benefit of employees, such as wage-hour, leave requirements, unemployment benefits, and equal opportunity laws
What is a 1099 Worker?
1099 workers are frequently unincorporated sole proprietors; they do sometimes form an LLC or corporation for tax or liability purposes. “1099” is a common term used when the IC uses Tax Form 1099 to report payments. 1099 workers are usually engaged by businesses to complete a specific task or project, such as ride-share drivers, graphic designers, or consultants.
1099 contractors are responsible for:
Calculating and remitting their own taxes
Setting their own schedules
Organising and maintain their own benefits and 401(k)
Managing business expenses
What is a Corp-to-Corp (C2C) Worker?
A Corp-to-Corp worker, often abbreviated as C2C, is a type of independent contractor who provides services through their own incorporated business entity, such as an LLC or corporation. Like 1099 workers, C2Cs are usually engaged by businesses for specific projects; however, the key difference is that the hiring business contracts with the independent contractor’s company, not the individual directly.
In this business-to-business relationship, the C2C is responsible for:
- Paying all applicable business and self-employment taxes, which cover both the employer and employee portions of Social Security and Medicare
- Managing business expenses
- Determining how and when work is performed
- Organising and maintaining benefits and insurances.
Why Is It Important to Understand the Difference Between 1099 vs W2 vs Corp-to-Corp Workers?
It’s essential to understand the distinctions between worker classifications when operating in the United States. Reasons why include:
Avoid Missclassification Risks
Misclassifying a worker as an independent contractor can result in substantial financial penalties from the IRS and other federal and state agencies, as well as potential employee misclassification lawsuits against your business.
Tax Implications
A worker’s classification affects how both your business and the worker are taxed. If you engage W-2 employees, you are required to withhold income taxes, pay the employer share of Social Security and Medicare taxes, and comply with applicable benefits laws, such as those under the federal Affordable Care Act.
In a C2C or 1099 arrangement, the business does not withhold or pay taxes on behalf of the independent contractor; instead, the independent contractor is responsible for reporting and paying their own income and self-employment taxes, as applicable.
Determines Business Control Over Working Schedule
When determining the appropriate type of worker arrangement for a project or role, it is important to assess how much control the business will have over the worker. Key factors include whether the business dictates specific hours, pay rates, and frequency, job duties, and the work location. Both federal and state agencies evaluate the level of control the hiring party exerts over these elements. In general, the more control the business has over how and when the work is performed, the more likely the worker is to be classified as a W-2 employee.
The Difference Between C2C vs 1099 Workers
Corp-to-Corps and 1099s are two different types of independent contractors. The video below explains the differences between C2C vs 1099 workers in the US.
What is the equivalent of an IR35 in the US?
An IR35 is a tax legislation that focuses on determining the employment status of contractors for tax purposes, but this ONLY applies in the UK. IR35 does not exist in the US. However, the IRS has guidelines to determine whether a worker is an independent contractor or an employee. Additionally, the federal Department of Labor, as well as state and local rules and regulations, also determine a worker’s classification status in the US. Workers that would be seen as inside an IR35 in the UK would be deemed as W-2 contractors, while those outside IR35 would be considered independent contractors.
The US equivalent to this would be the Worker Classification Laws. These laws are much further advanced than the UK and factor in more case laws. The US worker classification laws do vary state by state, meaning that there are 50 different versions. Each state government will have its own criteria for classifying whether a worker is an independent contractor.
How our Agent Of Record Service can help
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. Our Agent of Record service (AOR) can provide your business with access to comprehensive and up-to-date third party assessment tools for help in your determination of a worker’s classification. If our third-party robust assessment tool determined if an independent contractor can be compliantly engaged, we can offer a compliant solution to process C2C payments.
For more information, book a 1-1 call and speak to one of our employment experts, to further understand the difference between each worker classification.
Disclaimer: All information here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.