Both 1099s and W-2s are tax forms, such that are used by companies to report the earnings and taxes withheld for various types of employees. The two main employee classifications are W-2 employees and 1099 employees. There are key differences between these employee types and depending on the company structure, financial position, and industry, one type of employee might make sense over another. A W-2 employee is an actual employee, meaning, they are employed directly by the business and get a paycheck from that company. On the other hand, a 1099 worker is self-employed most often and is being hired by the company on a contract basis. In this article, we look at the differences when it comes to W-2 versus 1099 employees and the pros and cons of working with each.
W-2 Verses 1099 (Independent Contractor vs. Employee/)
As noted, a 1099 worker is considered an independent contractor. That is to say, they do not work directly for the company and thus do not receive a regular paycheck from that company. Following this, they do not have taxes withheld from any check they do receive as a result of work performed. Rather, it is their responsibility to pay taxes on any money they earn from a given firm. A W-2 employee does work for a company and has taxes taken out of every paycheck as a result of their employment status. It is so important to classify an employee/ person working for you properly as failure to do so can result in stiff penalties.
So how exactly do you know which classification an employee falls under? There are a few factors that go into determining an employee's status as either a W-2 or 1099 worker.
You can always look to the IRS for guidance in terms of employee classifications: W-2 versus 1099. That said, consider the following as you identify if a worker is a W-2 or a 1099 employee.
- If the firm controls the hours worked, how and when the employee works and how exactly they do their job when working, then it is likely they would be classified as a W-2 employee.
- Who controls how the work gets done and how the worker gets paid? Are expenses used for business reimbursed and who provides the toolsequipment necessary to complete a project? How you answer these questions can help clarify what type of employee you are dealing with.
- If the employee gets benefits, paid vacation time, and insurance, then it is likely that the employee would be classified as a W-2 employee.
Benefits and Drawbacks of a 1099 worker
Keep in mind, a 1099 worker does not work for the company but is instead hired by the company as a third-party entity to complete a project or task. Such are often called gig workers, freelancers, or independent contractors. After they've performed the work and you have paid them, you would send them form 1099 for that tax year which lists out exactly what was paid to them. A 1099 worker does set their schedule, decide how to do the work, in what manner, and when, assuming they complete the project within the agreed-upon timeline. They are responsible for paying their taxes as taxes are not withheld from the check that they receive from the business for which they are working.
Pros of 1099 workers
- They have special skills and experiences. Oftentimes, 1099 contractors can give you more specialized skills than what you might find using in-house employees. Plus, many have years of experience within a given niche and are thus well-versed within that niche.
- Can be hired on a short-term basis. Versus a W-2 employee who is often hired for the long term, with a 1099 worker you can create a shorter-term project for a one-off job. Of course, if you are satisfied you can always contract with that worker again, but the main point here is that you could be saving money by hiring on an as-needed basis.
- The affordability factor. Because you are not paying for benefits or insurance or certain withholdings, the cost of a freelancer could end up being quite a bit more affordable than a W-2 employee would be.
Cons of 1099 workers
- You have less control. As the name suggests, an independent contractor does indeed work independently of the company. Because they are not your employee, they are not controlled by you in a work setting. This is why you want to ensure everything is carefully outlined in the contract.
- Make sure you're on top of the legal considerations. The phrase breach of contract often occurs between companies and freelance workers. You want to ideally have a lawyer look over any such contract and ensure that you understand moving forward what is required of all parties involved.
Benefits and Drawbacks of a W-2 worker
A W-2 worker versus a 1099 worker is an actual employee of the business. This means that they receive a paycheck from you in which taxes get withheld, they often also receive benefits and certain types of insurances along with sick leave and vacation days. For many company owners, hiring on a W-2 employee makes more sense than contracting with 1099 workers.
Pros of W-2 workers
- You tend to control their work. Employers of direct employees tend to have more control of how/where/when that employee's work gets done. With company policies in place, there are further means of reinforcing work standards and practices to be followed by said employee.
- Longevity. Oftentimes, a contract worker will go from one employer to the next and there is not necessarily loyalty to any one firm. With an employee, however, you create that sense of loyalty and trust over the long term. This goes a long way toward solidifying your overall company culture as well.
Cons of hiring W-2 workers
- Employees can be more expensive. From the recruiting and hiring phase to the training and mentoring phase, there is a great deal of money that can potentially go into having an employee on board. Plus, of course, there are benefits and insurances that you as the owner need to pay that employee.
- You supply the resources. A freelance worker will often have their tools and supplies. With an employee, however, you supply them with what they need to accomplish the task at hand. Again, this is another area that could become costly for a business owner.
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