W-2 Employee

A W-2 employee is a worker in the United States who is formally classified as a company employee, as opposed to an independent contractor, with their annual wages and tax withholdings reported to the IRS and the employee themselves on Form W-2 at the end of each tax year. This classification indicates that the employer has withheld applicable income and payroll taxes throughout the year on the employee's behalf, and generally that the individual is entitled to the legal protections and benefits associated with employee status. Being classified as a W-2 employee typically means the individual is subject to greater employer direction and control over how their work is performed compared to an independent contractor, and is generally eligible for benefits such as unemployment insurance and workers' compensation coverage, along with any additional benefits the employer chooses to offer, such as health insurance or retirement plan participation. The distinction between W-2 employee status and 1099 independent contractor status carries significant legal and tax implications, and misclassifying a worker who should be a W-2 employee as a contractor instead can expose the employer to substantial back tax liability and penalties. Companies need to apply the appropriate legal tests to determine correct classification, rather than making this determination based solely on preference or convenience.