What is a W-2 Contractor?

A W-2 contractor is an individual who is issued a Form W-2 by a temporary work agency, but who works as a contractor for a client of the agency. In the work environment, a person can be classified as an employee or a contractor. An employee is a person who is supervised within a business and is subject to its work rules; the employer deducts taxes from the employee's pay, matches them in some cases, and remits these taxes to the government. Payments made to an employee are reported on the Form W-2 following the end of each calendar year. An example of an employee is an accounting clerk.

A contractor works independently, is not entitled to company benefits, can work for multiple companies, and is not subject to the work rules of an employer. This person pays his or her own payroll taxes. Payments made to a contractor are reported on the Form 1099 following the end of each calendar year. An example of a contractor is an independent consultant.

Given these two definitions, it appears impossible to be a W-2 contractor, since the Form W-2 applies to employees, not contractors. However, if a person were employed by a temporary work agency, the agency would be in the role of employer, and so would deduct taxes and issue a Form W-2 to the person. Meanwhile, the person would be working for the business that is paying the temporary work agency for his or her services. Thus, the person can be considered a contractor from the perspective of the business paying the temporary work agency, and an employee from the perspective of the work agency. Thus, the term W-2 contractor is an amalgamation of two different concepts.

Pros and Cons of W-2 Contractors vs. 1099 Contractors

The advantages of being a W-2 contractor are having some potential eligibility for benefits, unemployment protection, and a reduced obligation to directly pay taxes. Offsetting these advantages are less work flexibility and more employer oversight.

The advantages of being a 1099 contractor include greater flexibility, more autonomy, and the potential to earn more income. Offsetting these advantages are no benefits and more responsibility to pay taxes.