W-2 employees vs 1099-NEC contractors
Last updated: August 25, 2026
Every worker you put on Alpaca Payroll is classified as either a W-2 employee or a 1099-NEC contractor. This article covers where that choice is made, what it changes, and what to do about workers who live outside your state.
Where the choice is made
Worker type is set when you add the team member, in the Pay Information step of the Add Team Member panel, under Employment Contract. The Worker Type dropdown offers:
W-2 Employee
1099-NEC Contractor
Choosing one creates the matching payroll contract automatically. You also set the hire date, an optional effective date (defaults to today) and an optional contract end date at the same time.
This section only appears for organizations on Alpaca Payroll. Afterwards you can see the classification on the worker's profile, on the Pay Rates card under Payroll Contract, shown as Employee (W2) or Contractor (1099).
What actually differs
W-2 employee | 1099-NEC contractor | |
|---|---|---|
Tax withholding | Alpaca withholds and files payroll taxes on your behalf. | No withholding. The contractor is responsible for their own taxes. |
Year-end document | W-2 | 1099-NEC |
Overtime | Can be overtime-eligible; premium is calculated automatically. | Typically not overtime-eligible. |
State registrations | Triggers state payroll tax registration wherever the employee works. This is what the Expected Tax Notices tab is about. | Generally does not trigger state payroll tax registration. |
Paid time off | Can be assigned leave policies. | Leave policies can be scoped to exclude contractors. |
Both types are paid through the same biweekly cycle, on the same check dates, and both see their pay under My Payroll → Payments and their year-end document under My Payroll → Documents.
Out-of-state employees
Hiring a W-2 employee who lives in a state you do not already run payroll in has tax consequences. Talk to Alpaca first.
Alpaca shows this warning right at the top of the Add Team Member panel for a reason: a new state means new registrations, new withholding obligations, and often a new set of items on your Expected Tax Notices tab. Email support before you add the worker and we will tell you what is needed.
See also Operating in Multiple States: Foreign Qualification & State Payroll Tax.
Choosing the wrong one
Worker classification is a legal question, not a preference, and getting it wrong is expensive. Alpaca does not decide it for you. If you are unsure whether a role is genuinely a contractor relationship, take advice before setting it — and if a classification needs to change after the fact, email support rather than editing it, so the contract change and any already-issued pay are handled correctly.
Still stuck? Email support@alpacahealth.io and we will take a look.