# W-2 vs 1099 contractors

Source: https://launch-rec.com/compare/w2-vs-1099. Market: US. Updated: 2026-09-16.

## Should a staffing agency place contractors as W-2 or 1099?

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.

## 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.

## FAQs

### 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.