W2, 1099 and ITIN: the terms many people get wrong
Hiring as W2 or 1099 changes taxes, cost and risk. And ITIN, EIN and SSN are not the same thing. Understand them before a mistake turns into a penalty.
Some words decide your business and go unnoticed. W2, 1099, ITIN, EIN. Many contractors mix up these terms, and the mistake does not stay in the conversation: it shows up in the tax bill, in the cost of labor and in the risk of a penalty.
It is not the label you write on paper that decides whether someone is an employee or a contractor. It is the actual working relationship. The IRS looks at the facts, not at the label.
SSN, ITIN and EIN: three numbers, three functions
| SSN | Identifies the individual. For citizens and residents. |
| ITIN | For people not eligible for an SSN to file taxes and open a business. It does not authorize work. |
| EIN | Identifies the company to the IRS. You do not need an SSN or ITIN to get one. |
W2 and 1099: the difference that hits your pocket
Both are ways to pay the people who work for you, but they work very differently:
| Point | W2 · employee | 1099 · contractor |
|---|---|---|
| Taxes | The company withholds and pays. It pays half of FICA, 7.65%. | The contractor pays their own taxes, the 15.3% self-employment tax. |
| Control | You set the schedule, the tools and how the work is done. | They decide how to do the work. You hire the result. |
| Extra cost | Workers' comp, unemployment and benefits are part of the cost. | No direct charges of this kind, but a higher classification risk. |
| Document | Form W2 at the end of the year. | W9 at the start, 1099-NEC at the end of the year. |
The relationship decides the classification, not the label
The IRS looks at three areas to determine whether someone is an employee or a contractor: behavioral control, meaning who directs how the work is done; financial control, who pays for tools and materials and how payment is arranged; and the type of relationship, whether it is permanent, includes benefits and is core to the business. Calling someone who works as an employee a 1099 does not protect you.
The 2026 numbers
- 1099-NEC from US$2,000. The threshold for issuing a 1099-NEC rose from US$600 to US$2,000 per contractor per year.
- 15.3% self-employment tax. A 1099 worker pays it on the first US$184,500 of net earnings, plus Medicare above that.
- 7.65% FICA. Under W2, this is the half the company pays on top of the employee's wages.
The risk of misclassification
It is not theoretical. When misclassification is caught, the bill combines back taxes, penalties, interest and legal costs. Averages range from US$10,000 to more than US$100,000 per misclassified worker. And construction is among the industries the Department of Labor watches most closely.
How to decide in practice
- If you control the day to day, it is W2. Fixed hours, your tools, your supervision: that is an employee.
- If it is occasional, independent work, it can be 1099. The person has their own company, other clients and decides how to do the work.
- When in doubt, document. A signed W9, a clear contract and a record of how the relationship works. Organized paperwork protects you.
- Confirm with an accountant. The rules change by state and the cost of getting it wrong is high.
This is general guidance, not tax advice. Before deciding how to hire, confirm your situation with an accountant or attorney. Rules and amounts change and vary by state.
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Founder of FourRise Consulting. Business owner with direct experience in the construction industry in the United States and creator of the F.O.U.R. Method.