How do I decide between 1099 and W-2 for my staff, and how does it change setup?

operatordirectorLast verified Oct 6, 2026

1099 contractors are independent workers with no taxes withheld; they handle their own taxes, and you skip the work location, tax, and pay schedule steps. W-2 employees are on your payroll, so taxes are withheld and filed for them, and setup adds a work location, federal and state tax setup, and a pay schedule.

Where:

Payroll → Organization, the first question on the page: "Who will you pay?"

Pick one of three answers. You can change it later with the Change link.

1099 contractors: independent workers you pay a flat amount or by the hour. No taxes are withheld. They handle their own taxes.
W-2 employees: staff on your payroll. Taxes are withheld from each check and filed for them.
Both: some of each.

If you choose 1099 only, the work location, taxes, and pay schedule steps don't appear, since contractors don't need them. Company setup itself still asks for your business details, owner details and ID verification, agreements, and bank, because those are required before any money can move.

Answer this before you start Company setup. If an EIN set up for contractors only later needs to pay W-2 employees, contact us; it can't be switched from the page.

When can I start paying?

1099 contractors can be paid once your business details are verified.
W-2 employees need your company fully set up, including federal and state taxes.

Good to know

You decide whether each person is 1099 or W-2, not Tourney Direct. On the Employees & Contractors page each person has a W-2 / 1099 toggle, and the page links to a 5-question tool if you're unsure. For anything else, ask your accountant. See PR-06.
Chose 1099 only? You'll see Company setup and Approvers in PR-03.
Chose W-2 or Both? You'll also add a work location, taxes, and a pay schedule, all covered in PR-03.
The set of documents and agreements you'll sign also depends on this answer; see PR-04.