Compare · US
W-2 vs 1099
Should a staffing agency place contractors as W-2 or 1099?
The verdict
For agency-supplied contract work, W-2 is the defensible default: you control assignment, rate and supervision, which is what classification tests examine. Reserve 1099 for genuinely independent, project-scoped specialists you can evidence — misclassification penalties and client indemnity claims cost far more than the burden you saved.
Reviewed by James Doyle · Updated 2026-09-16
Side by side
| Factor | W-2 | 1099 |
|---|---|---|
| Employer burden | 12% to 16% of pay | None |
| Who withholds tax | The agency | The worker |
| Workers' compensation | Agency carries cover | Usually the worker's own policy |
| Classification risk | Low | High, and it sits with the agency |
| Client acceptance | Universal | Often prohibited in MSP and enterprise contracts |
| Funding | Fundable by payroll funders | Harder to fund |
Choose W-2 if
- The client directs the work, hours or location
- The assignment is ongoing rather than project-scoped
- You want a fundable, saleable contract book
Choose 1099 if
- A genuinely independent specialist with their own business and clients
- Deliverable-based scope with the contractor controlling method and schedule
- You can evidence the classification if challenged
The tests differ by state
California's ABC test is the strictest widely applied standard and is difficult for agency-supplied labour to satisfy. Federal tests focus on economic reality and control. Several states apply their own variants for unemployment insurance.
Because the tests differ, a classification that holds in one state can fail in another for the same role.
Who pays when it is wrong
Back taxes, penalties, unpaid overtime and benefit claims typically land on the entity that engaged the worker — the agency. Client contracts usually contain indemnities pushing the cost back to you as well.
Common questions
Can a client insist we place workers as 1099?
They can ask, but the liability generally stays with the agency that engaged the worker. If the facts point to employment, a contract clause will not protect you.
Does W-2 mean we have to offer benefits?
Benefits obligations depend on size and hours, most notably the Affordable Care Act employer mandate at 50 or more full-time equivalents. Payroll taxes and workers' compensation apply from the first W-2 worker.
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