# W-2 Employee

> A W-2 employee is a US worker whose employer withholds income tax, Social Security, and Medicare from their pay, reports annual earnings on IRS Form W-2, and must provide labour-law protections such as minimum wage, overtime, and benefits eligibility.

A W-2 employee is the standard form of employment in the United States, named after the IRS Form W-2 that an employer issues each year to report the worker's wages and the taxes withheld from them. The employer controls what work is done and how, and in return takes on payroll and labour-law responsibilities.

For a W-2 employee, the employer withholds federal and usually state income tax, plus the employee's share of Social Security and Medicare, and pays a matching employer share on top. The employer also handles unemployment insurance, and typically extends protections and benefits such as minimum wage, overtime pay, and eligibility for company health and retirement plans.

The alternative is a 1099 contractor, who is self-employed, handles their own tax, and receives none of these protections. Whether a worker is properly a W-2 employee or a 1099 contractor is decided by the IRS common-law test, which weighs behavioural control, financial control, and the nature of the relationship, not the label a business prefers.

## What does the 'W-2' actually refer to?

It refers to IRS Form W-2, the Wage and Tax Statement an employer must send to each employee and to the tax authorities after year-end. It reports the wages paid and the income tax, Social Security, and Medicare withheld. Being a W-2 employee is shorthand for being on an employer's payroll.

By contrast, a self-employed contractor receives a Form 1099-NEC reporting what they were paid, with nothing withheld.

## How is a W-2 employee different from a 1099 contractor?

A W-2 employee has tax withheld by the employer, receives labour-law protections, and often gets benefits. A 1099 contractor is self-employed, invoices for their work, pays their own self-employment tax, and receives no employer benefits. The difference is set by the working relationship, not by which form the business would rather issue.

## Who decides whether someone is a W-2 employee?

The IRS common-law test is the baseline. It examines three areas: behavioural control over how the work is done, financial control over the business side of the arrangement, and the type of relationship, including written contracts and permanency. No single factor decides it; the overall picture governs the outcome.

The IRS sets out this framework in Publication 15-A, its supplement to the Employer's Tax Guide.

## Key facts

- **Baseline classification test for W-2 status:** The IRS common-law test governs whether a US worker is an employee for federal income-tax withholding, weighing behavioural control, financial control, and the type of relationship. (Source: Internal Revenue Service, verified 2026-07-28)
  The IRS sets out the framework in Publication 15-A; no single factor is decisive.
- **Contractor reporting threshold:** Payments of 600 US dollars or more to an independent contractor are reported on Form 1099-NEC, not a W-2. (Source: Internal Revenue Service, verified 2026-07-28)
  The 1099-NEC threshold is a reporting trigger; it does not itself decide whether a worker is an employee or a contractor.

## W-2 employee vs 1099 contractor

|  | W-2 employee | 1099 contractor |
| --- | --- | --- |
| Tax handling | Employer withholds and remits | Contractor pays own self-employment tax |
| Year-end form | Form W-2 | Form 1099-NEC |
| Labour-law protections | Minimum wage, overtime, and more | Generally none from the business |
| Benefits | Often eligible for company plans | Provides their own |
| Direction of work | Employer controls how and when | Contractor controls their own methods |

## Frequently asked questions

### Does issuing a W-2 make someone an employee?

Issuing a W-2 reflects that the business has treated the person as an employee, but the underlying status is decided by the working relationship under the IRS common-law test. If the relationship is genuinely employment, the worker is an employee whether or not the correct form was issued.

### What taxes does an employer handle for a W-2 employee?

The employer withholds federal income tax, usually state income tax, and the employee's share of Social Security and Medicare. It then pays a matching employer share of Social Security and Medicare, plus federal and state unemployment tax. All of this is reported and remitted on the employee's behalf.

### Can a worker be both a W-2 employee and a 1099 contractor?

In separate roles, yes. A person can be a W-2 employee of one business and a 1099 contractor for another, or occasionally both for the same business if the tasks are genuinely distinct. That last case draws scrutiny, so the separation of duties needs to be clear and defensible.

### How does an EOR issue W-2s for my US team?

A US employer of record acts as the legal employer, running payroll under its own registration and issuing the W-2. You direct the work; the EOR withholds and remits taxes and provides statutory protections, which lets you employ someone compliantly without setting up your own payroll entity.

## Sources

- [Employee (common-law employee)](https://www.irs.gov/businesses/small-businesses-self-employed/employee-common-law-employee), Internal Revenue Service
- [About Publication 15-A, Employer's Supplemental Tax Guide](https://www.irs.gov/forms-pubs/about-publication-15-a), Internal Revenue Service
- [About Form 1099-NEC, Nonemployee Compensation](https://www.irs.gov/forms-pubs/about-form-1099-nec), Internal Revenue Service

_Last updated 2026-07-28. Reviewed by Teamed's in-house employment-law team. Source: https://www.teamed.global/glossary/w-2-employee_