Whether you’re filling in for someone on leave or need additional help around holidays or events, 1099 workers can provide the flexibility you need.
But they also come with costs. Read on to understand the differences between these two types of employees. Then, decide which employment status makes sense for your business.
Flexibility
W-2 employees get their name from the tax form employers must file with the IRS to employ them. These workers are paid a set salary regularly and receive employee benefits, such as health insurance and vacation days. In contrast, 1099 independent contractors get their name from the tax form they must file with the IRS to report their income for freelance work.
Unlike W-2 employees, 1099 workers don’t receive payroll taxes (Social Security and Medicare) withheld from their paychecks by the employer. If you’re using 1099 workers, it’s up to your business to cover their self-employment taxes, which can add up quickly. Additionally, you’re not required to provide them with standard employee benefits like health and dental insurance or workers’ compensation.
The flexibility offered by W-2 employees comes at a cost, however. Because you’re responsible for managing their schedules and ensuring they meet project deadlines, you may have to compensate them with higher wages to satisfy them.
Likewise, 1099 contractors can be less reliable than traditional employees. They may choose to take on other clients or projects, making it difficult for you to manage their time and schedules effectively. This can result in missed deadlines and a lack of consistency. In both cases, you’ll need to factor these factors into deciding which type of worker is right for your organization.
Taxes
If you hire W-2 employees, you’ll need to manage payroll taxes. These include income tax withholding, employer’s share of Social Security and Medicare taxes, state unemployment insurance, workers’ compensation coverage, and more. This can add up quickly, especially if you have many full-time employees.
With 1099s, these expenses aren’t incurred. This is one reason that independent contractors, or “gig” workers, have become a more popular choice for many businesses. However, making the correct classification for each worker is important so you can avoid paying overdue or back taxes and penalties.
To determine if someone should be classified as W-2 and 1099 workers, the IRS has a set of guidelines to help employers make the right decision for each individual. This includes asking a series of determining questions and then looking at the entire relationship to decide. Using this guidance will ensure you get the most accurate and efficient results when managing payroll and tax payments for each of your employees or contractors. You can also use a reputable payroll services provider to help you classify workers and file the appropriate information returns. If you incorrectly classify a worker, the IRS will apply severe penalties. This is why it’s best to rely on this process rather than trying to determine yourself.
Benefits
W-2 employees have taxes withheld from their paychecks, receive training, and may be provided benefits. These workers are often paid hourly, directly contributing to the company’s overall productivity and efficiency.
Those are important factors when deciding whether to hire a W-2 employee or an independent contractor. However, the financial costs of hiring W-2 employees can be significant if the company regularly utilizes the services of these individuals. The additional taxes must be withheld from each payroll, including social security, Medicare, and unemployment insurance. This can quickly add up, and you choose a 1099 employee more cost-effectively.
One thousand ninety-nine workers typically have specialized skills and can complete projects in less time. This makes them a valuable resource for short-term projects that don’t require full-time employees. Additionally, they can be a better fit for companies that operate on deadlines or need help with specific projects like a marketing campaign or client relationship management.
However, if the work is core to the company culture and the business will need this support long-term, investing in an employee might be more beneficial. This is especially true if the company needs help managing people or could benefit from managerial support. If a 1099 worker is needed indefinitely, the company might consider reclassifying them as W-2 employees.
Control
Generally speaking, companies have much more control over the work of W-2 employees. They can instruct their team members on completing projects, provide tools and training to accomplish tasks, and set the hours and schedules for when they work. They also can reimburse employees for approved expenses and pay overtime protection.
Employees who are paid under the W-2 status also have the opportunity to access a wide range of benefits. These include health insurance, vacation days, and more. In general, this allows companies to attract and retain the best talent in the market, which can boost productivity and business growth.
However, companies may be liable for significant penalties and fines when they misclassify their employees. The recent Dynamex and Uber court cases have established that it’s the employer’s responsibility to properly classify their workers and ensure they meet all the criteria for being classified as a W-2 employee.