Everything Your Business Needs To Know About 1099 VS W2 Employees

Ever wondered what the difference is between a 1099 contractor and a W2 employee? Believe it or not, the answer is both easier — and more complicated — than you might expect. It all boils down to this: If you tell your workers both what to do and how to do it, then they are probably W2 employees. On the other hand, if you only control the results and not the process, then they are probably 1099 contractors. The distinction may seem simple, but the implications are wide-ranging and can be fairly complex.

Read on for more information on why it is so important to know the difference between 1099 workers and W2 employees, how to tell which is best for you, and why a misclassification may cost you a lot of money.

1099 VS W2 Employees

Here’s the most important thing to remember: 1099 workers are contractors, and W2 personnel are employees.

Employees are full-time staff members who make up your team on a day to day basis. W2 employees are salaried workers, with benefits, insurance, and vacation days.

1099 workers, on the other hand, are freelancers, contractors, or independents who work with you on a contractual basis. Independent contractors are common in many industries. Food delivery companies for example, generally use independent contractors to do their deliveries.

While a W2 employee considers themselves a part of your organization, a 1099 worker is the owner (and employee) of their own business. They must pay both employer and employee taxes on their income.

For tax purposes, if you classify a worker as an independent employee, you must have a sound reason for that decision. Further, you cannot classify a worker as a 1099 contractor if you have previously classified similar workers as W2 employees. Such inconsistencies could open you up to heavy fines or lawsuits.

Let’s get into more detail.

What Is A 1099 Worker?

1099 workers are independent contractors or freelancers. They are contracted to work for you for a period of time, and work more or less independently. It’s the employer’s responsibility to properly classify a worker as an independent contractor for tax purposes. Many business entities opt to hire freelancers to reduce the payroll workload.

1099 workers are paid according to their contract terms. They don’t earn overtime or minimum wage. Employers have limited control over independent contractors, who follow their own schedules and work patterns. As long as a 1099 contractor is meeting their deadlines and obligations, an employer has no business saying how and when the work should be done. 1099 employees can work remotely as long as they meet their contractual obligations. They often don’t have permanent work stations.

At the same time, 1099 workers don’t enjoy certain protections as retirement plans, disability, and medical insurance from their employers Contractors are responsible for their own taxes. They may incur more tax obligations, like lump-sum prepayments and additional tax payments on top of the normal filing.

Employers are not obligated to withhold taxes from a freelancer’s paycheck. It’s the 1099 worker’s responsibility to remit the tax to the IRS. The employer’s only role is to provide the 1099 form, and the freelancers or independent contractors must file their own taxes.

That said, if the 1099 worker complies, the employer may deduct certain expenses, like meals and travel, mileage, supplies, licenses, and legal services.

Generally, employers hire 1099 workers to help cut costs. With a contractor, you’re off the hook for payroll administration, worker’s compensation, minimum wage, most overhead costs, overtime, HR tasks, and management of employee relationships. Freelancers are not covered by workers’ compensation and this means that they do not expose the company to certain legal risks. The employer does not risk claims of wrongful terminations.

Independent contractors also bring in specialized expertise. They have skills that may be a little unique, hard to get, or that you may only need on a seasonal basis. Independent contractors provide specific skills or expertise that you might need for a particular project. They focus on one thing and will probably deliver a superior quality of work.

And because they come in to do a specific job, 1099 workers are more flexible in terms of hours and budget. In fact, the kind of people who are independent contractors by choice are typically the kind of people who value freedom and independence.

What Is A W2 Employee?

A W2 employee is a long-term employee that receives the benefits and wages of a regular employee. It is your responsibility as an employer to withhold income taxes from W2 employee paystubs and remit them on their behalf.

Employers have more control over W2 employees than they do over contractors, and they also have more responsibility for them. W2 employees receive more benefits, like tools, training, insurance, a reliable salary, and working materials.

In return, they must comply with all their employer’s rules and regulations since they work there full time.

W2 employees are important for growing businesses with increasing human resource requirements. Organizations that experience constant demand for their services are also ideal for W2 Employees. They give founders an opportunity to form closer working relationships and to mentor employees to fulfill their own unique requirements.

Employers great responsibility toward their W2 employees. They must pay a minimum hourly wage, at the very least. They must also provide benefits. They have to take care of withholding and filing taxes on behalf of employees, and they have to provide W4 forms.

(Even though it is the employer’s responsibility to withhold taxes, employees must file their own W2 taxes during tax season.)

The Key Differences Between 1099 & W2 Employees

Are you working with an independent contractor or an employee? The answer to this question depends on a few factors.

Wrongly classifying a worker exposes you to the risk of paying extra taxes and fines to the IRS. For example, if you wrongly classify a W2 employee as a 1099 worker, you may have to pay the IRS the taxes that you failed to withhold from them.

The difference between independent contractors and employees depends on the nature of your relationship with them, exactly how much control you have over them, and how much responsibility you have over the individual.

Here are the three factors that determine a worker’s status according to the IRS:

.attn p {font-size: 20px !important; color: #181818 !important;}

When examining any written contracts you have with your worker, you will probably find information that details your relationship and helps you to classify that person correctly for tax purposes. Employees have pension plans, vacations, insurance, and a long term working contract with you.

It is important to know whether your worker is one or the other so that you can choose between withholding their taxes directly or letting them take care of their own taxes. A mistake can be costly.

The IRS advises looking at these factors from all three categories to choose the correct classification. It’s vital to then document not only how you classified your worker, but what factors informed your decision. Employers who cannot make the determination even after reviewing these factors will have to fill a Form SS-8 and the IRS will determine the status of the employee officially. The process will take six months or more.

How To Choose Whether To Hire 1099 Or W2 Employees

1099 and W-2 workers both provide vital services to businesses. Which type of worker is better for your business? Consider the following things before hiring:

• Ultimate Cost: To avoid the extra labor of managing human resources and save time and money for other responsibilities, a 1099 employee is the better option. W2 employees are entitled to minimum wage, benefits and the employer pays their payroll taxes.
• Oversight: Independent contractors use their own methods, tools, and define their work to complete the task they were hired to do. W2 employees wholly rely on the business schedule to do their work.
• Expenses: All the expenses incurred by a W2 employee in the course of their work are reimbursed by the business. Unless it is indicated so in the contract, the expenses of a 1099 employee in the course of work are not reimbursed by the employer.
• Commitment: A W2 employee involves a long-term commitment on your part. If you need additional help in your business, but you want to give the person a test drive first before committing yourself fully, it’s safer to go with a 1099 hire.

If you’re still not sure, answer the following questions for your business:

• What type of work do I want done?
• What is my budget?
• What kind of expertise am I looking for?
• How much control do I need over the process and product?
• Am I trying to meet a long term role or a temporary need?

1099 VS W2: Which Is Better For Your Business?

Employers often prefer working with 1099 workers or independent contractors because they can be cheaper. With a 1099 worker, you don’t have to pay benefits like health insurance, bonuses, over time, and other benefits like 401(K).

Nevertheless, many employers still prefer to hire W2 employees. With a full-time employee, you benefit from a longer-term commitment. The employee feels secure and will be more focused on doing their jobs than finding the next one.

The Benefits Of Hiring Independent Contractors

• Guaranteed Expertise: Sometimes employers have a need or project that requires some unique skills and expertise. You can save money by hiring a specialized contractor for a short time, rather than paying a specialist’s salary.
• Cheaper: Independent contractors are cheaper. Even when they earn more per hour, you still save money because they don’t get reimbursements and benefits. You don’t pay for things like vacations or unemployment tax.
• Freedom: Both the employer and the contractor enjoy greater freedom from working with this kind of arrangement. As an employer, you don’t have to manage the performance of an independent contractor, and you have much less paperwork to deal with.

The Benefits Of Hiring W2 Employees

• Security: For W2 employees, job security and closer work relationships are the major benefits for the employer and employee.
• Greater Control: Employers enjoy a lot more control when they hire a W2 employee than when they work with an independent contractor. An employee is someone that you will have the opportunity to train. You can guide their daily schedule to ensure that they carry out their tasks in a particular way.
• Commitment: When you work with a W-2 employee, you have someone who is with you for the long haul instead of just one project. This gives you the opportunity to train and mentor people to fit in with your company culture and your unique way of doing things. You can also get them to carry out a wider variety of roles than is possible with an independent contractor. This means that you can delegate more.

There is a lot to think about, but at the end of the day, you want a solution that works for your specific needs. Both worker classifications have their own pros and cons, and while more and more people are becoming independent contractors, many companies are still finding value in W2 employees.