The difference between Layer 2 and Layer 3 switching is the type of information inside the frame that is used to determine the correct output interface. With Layer 2 switching, frames are switched based on MAC address information. With Layer 3 switching, frames are switched based on network-layer information.

Layer 2 switching does not look inside a packet for network-layer information as does Layer 3 switching. Layer 2 switching is performed by looking at a destination MAC address within a frame. It looks at the frame's destination address and sends it to the appropriate device. Layer 2 switching builds and maintains a switching table that keeps track of which MAC addresses belong to each port or interface. If the Layer 2 switch does not know where to send the frame, it broadcasts the frame out all its ports to the network to learn the correct destination. When the frame's reply is returned, the switch learns the location of the new address and adds the information to the switching table.

Layer 3 switching operates at the network layer. It examines packet information and forwards packets based on their network-layer destination addresses. Layer 3 switching also supports router functionality.

For the most part, Layer 3 addresses are determined by the network administrator who installs a hierarchy on the network. Protocols such as IP, IPX, and AppleTalk use Layer 3 addressing. By creating Layer 3 addresses, a network administrator creates local areas that act as single addressing units (similar to streets, cities, states, and countries), and assigns a number to each local entity. If users move to another building, their end stations will obtain new Layer 3 addresses, but their Layer 2 addresses remain the same.