What is a W-2 employee

A W-2 employee is any worker in a formal employment relationship with a US company or organization who receives a W-2 tax form annually to report their earnings and tax deductions.

Key characteristics of a W-2 employee include:

• Employer-employee relationship: W-2 employees are hired by a company and have a formal employment contract or agreement with a recognized employer
• Regular wages and benefits: W-2 workers receive a regular salary or hourly wage and are often eligible for employee benefits like health insurance, paid time off, and retirement plans
• Taxes withheld: Employers withhold income taxes, Social Security, and Medicare from W-2 employee paychecks and pay these taxes to the government on their behalf
• W-2 Tax form: W-2 employees receive a W-2 form at the end of the year that reports their earnings and withheld taxes, which they use to file their tax return

Their name comes from the W-2 tax forms they use to report their annual earnings.

What is an example of a W-2 employee?**

W-2 employees are the most traditional type of worker. You hire them to work under you, you control their hours and roles, and you are responsible for their workspace or equipment, including their:

• Tools
• Software
• Office space, desk, chair, and
• Computer

Some examples of W-2 employees include:

• Salaried employees whose work schedule you control
• Hourly workers in customer services, sales, labor, etc.
• Management officials and executives

What is the difference between a W-2 and a 1099 employee?

W-2 employees are considered "employees" rather than "contractors" or "freelancers" and are entitled to certain benefits and protections under US law, such as health insurance, paid time off, overtime, unemployment, and workers' compensation insurance.

W-2 employees also rely on you for their workspace, pay, tax compliance, work schedule, and training.

💡This definition is specific to the United States and may not apply to other countries.

In contrast, even though you hire contractors, 1099 employees or independent contractors are technically self-employed. Their name comes from the 1099 tax form, which they fill out independently because they are responsible for their own taxes.

Independent contractors and freelance workers:

• Set their own work schedules
• Procure their own tools, workspaces, and software
• Work under one or several employers

See: How to compensate remote workers compliantly

How do I determine if a worker is a W-2 employee or independent contractor?

The surest measure of whether a worker is a W-2 employee or an independent contractor is your degree of control over their work. According to the IRS, there are three ways to measure this metric:

• Type of relationship: If you and a worker have a permanent written contract with benefits, and their work is a key aspect of your business, they are likely employees.
• Behavior: If you control or have the legal right to control how and when a worker does their job, they are probably employees.
• Finances: If you provide workers with tools, software, and office space, pay their hourly wage or salary, withhold their taxes, and offer them benefits, they are your employees.

That said, there is no one-size-fits-all answer to the employee vs. independent contractor question. Labor laws vary, especially across different jurisdictions and when dealing with remote workers.

Use Deel’s AI Classifying tool to check with 90% accuracy if your workers are W-2 employees or contractors.

See also: A complete guide to employee contracts

When should I hire a W-2 employee?

You need a W-2 employee, as opposed to an independent contractor, if:

• The role you’re hiring for is ongoing and central to your business operations
• The project you need help with is long enough to warrant long-term engagement
• You need more control over work hours and schedules
• You can provide a steady salary and benefits
• You have an opening for a role previously held by a W-2 employee

What W-2 employee benefits must I provide in the US?

The US federal government requires employers to provide the following five benefits to W-2 employees:

Medicare and Social Security Contributions (FICA)

FICA taxes support Medicare and Social Security benefits for people over 65. These federally-mandated benefits cover US workers later in life or in the event of disability. The IRS deducts them from both the employee and employer during an employee’s work years.

See also: How to maintain COBRA compliance

Health Insurance (ACA)

The Affordable Care Act (ACA), colloquially known as Obamacare, is a US law that requires employers with 50 or more full-time employees to provide their employees with healthcare coverage. Qualifying employers must also report the value of the coverage provided, including the types and costs of insurance plans offered to employees during a calendar year.

Family and medical leave (FMLA)

The Family and Medical Leave Act (FMLA) is a US law that requires employers to provide employees with up to 12 weeks of job-protected, unpaid leave every year for family and medical reasons.

It applies to employers with more than 50 employees and covers events such as:

• The birth of a child
• Transition into active military duty
• Caring for a sick spouse or close family member
• Recovering from a serious health condition

The FMLA protects employees from retaliation or job loss when they take time off work to deal with family, medical, or personal emergencies.

See also: Maternity and paternity leave around the world

Workers’ compensation insurance

Workers’ compensation insurance, or simply workers’ comp, covers employees who cannot work because of a work-related injury or illness. It covers medical and rehabilitation costs for employees injured on the job and thus unable to work.

Workers’ comp may also cover:

• Treatment and surgery
• Paid leave
• Replacement income
• Pain and emotional suffering, and
• Punitive damages

Unemployment insurance (FUTA)

Employers in the US must provide income support for individuals who have lost their jobs but are able and willing to work. Known as federal unemployment taxes or FUTA, this benefit offers temporary partial income for employees who involuntarily lose their jobs. Both employees and employers contribute to FUTA.

💡62% of employees would leave their current employer for better benefits. To raise your employer profile, consider offering your workers additional voluntary benefits and financial support.

Are W-2 employees full-time?

W-2 employees can be temporary, part-time, or full-time. Their W-2 classification comes from their tax status, not their work hours or schedule.

Similarly, W-2 employees may receive an hourly wage or salary. Again, their W-2 status does not depend on their pay structure.

Who is responsible for W-2 tax deductions?

Employers are responsible for deducting payroll taxes from W-2 employee paychecks. After deductions, you must report all payroll activity to the IRS in a W-2 tax form your employee fills.

💡The equivalent of the W-2 tax form for independent contractors is the 1099-MISC.

What is a W-2 tax form?

Form W-2 (Wage and Tax Statement) is a tax form that reports the amount of money an employer pays an employee per annum and the amount of income tax they withhold from this amount for the IRS.

As a W-2 employer, you must provide W-2 employees with a copy of Form W-2 every calendar year to fill out and file tax returns with the IRS.

💡Employee Tip: If you don't receive a W-2 tax form from your employer, contact the Internal Revenue Service (IRS) for assistance. The IRS allows employees to request copies of W-2 forms directly if they don't receive one from their employer past the deadline.

You can send W-2 statements digitally or on paper. You must provide the form at the end of each year no later than January 31st of the following year.

For every W-2 tax form you send:

• Keep one copy for your records (for at least 3 years)
• File one copy with your state, city, or local department (if asked to)

What is the non-US version of a W-2 tax form?

The W-2 tax form, from where W-2 employees get their name, is a US document provided under US law for US citizens. For foreign, nonimmigrant workers working in the US, you may need to provide Form 1042-S at the end of the year for tax reporting purposes.

For remote workers outside the US, taxes are typically paid to the home country, not the US.

However, in most cases, you may be required to deduct a 30% withholding tax from a remote worker’s pay unless they file Form W-8BEN. This form qualifies workers for a tax deduction or exemption on all US-sourced income if they live in a country with a tax treaty with the US.

Do W-2 employee rules apply to international assignees?

Whether the income tax rules that apply to US W-2 employees apply to your workers assigned abroad depends on their residency status.

• US citizens and permanent residents (green card holders) who work outside the US for US companies are subject to US tax laws and qualify as W-2 employees
• US residents who are present in the country for significant amounts of time, enough to not lose residency status, are also subject to W-2 tax rules
• Nonresident employees assigned abroad to a US company are not subject to W-2 tax laws or tax withholding because their income is not *US-sourced

*US-sourced income is income provided by a US company operating within the country. It refers to where the money comes from, not where it is paid. If a non-US citizen works for a US company based in their country, their income is not US-sourced; hence, they are not subject to US tax laws. Alternatively, a remote worker who earns income from a US-based company is subject to withholding tax laws because their income comes from the US.

What are the consequences of misclassifying a W-2 employee?

Misclassifying a W-2 employee is a serious compliance breach that carries severe financial penalties, sanctions, and the possibility of lawsuits.

To misclassify an employee is to mislabel them as a freelancer or independent contractor rather than an employee. If you misclassify a W-2 employee, you deny them the benefits that come with that worker classification. You also fail to deduct and contribute to their taxes.

If the IRS, through an audit, finds that you have misclassified a W-2 employee, they will order you to start paying all legally required taxes and benefits. They may also charge you with:

• Reimbursing the employee all the wages you should have paid them, including overtime
• Paying back taxes and penalties for the federal and state income taxes you failed to deduct and contribute to, including unemployment and Social Security
• Setting up employee benefits for the employee, including a retirement plan and health insurance
• Paying workers’ comp benefits

See also: Compliance challenges of managing a contingent global workforce

Can I convert a 1099 employee into a W-2 employee?

Yes. You can transition an independent contractor into a full-time W-2 employee by hiring them for an open position. Use a recruiting service like Deel to streamline the move and onboard the employee to your HR and payroll systems for continued compliance.

If you want to transition an employee into a contractor, consult your legal team. This move is harder to make and will involve the IRS, because all workers are generally considered employees unless proven otherwise.

Avoid misclassification risks with Deel’s People Platform

Avoiding misclassification begins with understanding what a W-2 employee is and all the benefits and tax laws that apply to this worker classification.

But, as we said, identifying a W-2 employee is rarely black-and-white. Use Deel’s People platform to reclassify all your workers and onboard all new hires compliantly.

Our HR solutions include:

• AI classifier
• Streamlined onboarding and onboarding
• Global hiring and payroll
• Contract management
• Compliance monitoring

Contact us to speak to a member of the sales team, or book a demo today to see Deel in action.