Employment categories aren’t binary. How we identify them matters.

October 5, 2018

Am I a W2 or 1099? Is 1099 better or worse for taxes? How do I know if I’m a contractor or employee? Versions of these questions pop up all over the internet. There are plenty of resources available to learn what the classifications mean, which type you should be in which employment arrangements, and the benefits and challenges of each.

And yet, there still seems to be a lot of confusion. Of course, people don’t pay particularly close attention to tax forms as a personal identity. But it still seems like there is genuine uncertainty about what the statuses mean and when they should be used. Why?

Perhaps it’s because work is changing. There is a full spectrum for how we engage each other in the transfer of value, and government tax designations are not keeping up.

The gig economy has gotten a lot of attention related to its swell in workers, growing reach and influence on our lives, and even legal misclassification. However, the gig economy is only one small part of the story.

Historically, work centered around a single place of employment that remained relatively stable over decades. For most of the 20th century, the vast majority of work (outside of the home) took place in a factory or office where employees were just that: employees. The few who didn’t fall into this category of worker were typically business owners or expert consultants who often became business owners themselves in order to receive adequate benefits.

The first W2 forms were issued to employees in 1944 as part of an effort to withhold taxes. The form’s name changed in 1965 from “Withholding Tax Statement” to “Wage and Tax Statement,” which is still its official name today. Because work was so homogeneous, the form served as a good way to help the majority of people manage their tax obligations.

Today, the nature of work is changing. More people are earning money through multiple income streams: a side-hustle on Etsy, a few part-time jobs in retail or restaurants, some logo design work for friends’ companies, or even traveling the world coding with Remote Year. The only constant is change.

This type of work generates 1099-MISC forms, frequently called just 1099. Originally issued in 1918, the form required employers to report salary of more than $800. Today, the 1099-MISC is used as a primary means of reporting income for independent contractors.

Even though 1099s are intended for contractors, new types of work are being defaulted into a 1099 as a catch-all, despite not fitting with the intended purpose of the form. As technology and marketplaces enable more types of non-traditional employment, workers (and their employers) are struggling to identify which form best applies to them.

So why does it matter how we label these new kinds of work? When I was a kid, there were only two types of employment. Does there really need to be a new category?

It matters a great deal how we classify work because of how the system has been constructed to support employees. Government regulation for employees encompasses a lot of really important things: tax withholding, discrimination protection, tax preference for retirement accounts, access to group rates for insurance, and access to unemployment benefits.

Those who have been working as full-time 1099 workers (freelancers, independent contractors) are probably already aware of these gaps, including the higher rates on taxes paid to cover the full obligation to Social Security and Medicare.

For workers in the new economy being grouped into this category, the lack of benefits is extremely costly. A misunderstanding of tax obligations can cost tens of thousands in an unexpected bill to the IRS. An IRA can limit annual retirement contributions to $5,500 per year — far below the $18,500 limit employees have with a 401K. A job loss can leave someone completely stranded without support from unemployment. Health and life insurance prices skyrocket because of individual risk pooling.

A better solution is not simple. A spectrum of employment statuses may be theoretically attractive, but it is practically a nightmare. Government systems are not equipped to manage sliding scales in an elegant way. The cost of re-categorizing and revising labor law for more than 50 million Americans is mind-blowing. Yet, none of this is an excuse. The government is designed to serve the people, and as our work changes, so must our safety net.