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1099 vs. W2 Employee: which is better for your business?

Someone who is an independent contractor is known as a 1099 worker. These workers generally provide a specific service that is outlined by a written agreement.

Adele Katz
Adele Katz
May 20, 2022

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What Is A 1099 Worker?

Someone who is an independent contractor is known as a 1099 worker. These workers generally provide a specific service that is outlined by a written agreement. These independent contractors include freelancers, consultants, entrepreneurs, and more professionals who can fly solo.

What Is A W2 Employee?

A W2 employee is an average, typical salaried individual – who is part of your business and your company payroll. Therefore, they are eligible to join in employee benefit programs, and they are meant to work according to your business' needs rather than their own.

Difference Between 1099 Vs. W2 Employee

But at the end of the day, what's important is that we need to know the difference between the two.

Well, first, 1099 workers are usually hired for a mutually decided amount of time, which can be renewed as many times as the contractor and business owners want – as long as it is mutually agreed on. Regardless of the length of their term, 1099 workers are the ones who define how and where they work. They take the risk of their profit or loss of their work.

And since the level of your supervision in a 1099 worker is comparatively low, so is your legal and financial responsibility. You are not responsible for paying their taxes, nor can they can any employee benefits from you.

Whereas W2 employees are granted legal protection because they are ensured at least minimum wage salary for the entire duration of their employment. Companies are only allowed to get rid of a W2 employee for bad performance or any justifiable reason.

Employers are expected to provide the tools and supplies for a W2 employee, unlike a 1099 worker who brings their own. Similarly, they are also reimbursed for all business-related expenses they encounter. W2 employees are also entitled to health insurance, retirement contribution, and many other employee benefits.

How To Determine Whether Your Employees Are 1099 Vs. W2 Employees

Now that we know the importance of knowing the difference between the two, how do we determine what your employees are classified as? 

The IRS and the Department of Labor are very stringent about misclassifications, and there are pretty severe consequences if you are caught. For example, they can give out penalties of more than 40% of the contractor’s pay, and the Department of Labor may demand that you pay the overdraft wages going as far back as three years.

The IRS provides some guidelines to help business owners classify their employees properly. They have provided 3 main categories that would help you:

Can you or your business control how, where, when, and what your workers do as they carry out their jobs?

How do you pay for your works? Is it a regular salary, or is it based on commissions?

Does your worker receive employee benefits? What have the terms of this relationship been defined as in the contract?

If you’re still unsure of what your workers can be classified as, even after considering these three guidelines, then you can file Form SS-8 with the IRS, who will then determine what they are classified as. They may take up to 6 months to do so, but it may be helpful for future hiring.

1099 Vs. W2 Employee: Which Is Better For Your Business?

The question remains, which is better for your business? 

Most small businesses prefer to work with 1099 workers because of its perceived cost-effectiveness. Business owners would not have to pay employment taxes, compensation, insurance, and more, which are all necessary for W2 employees. However, you can only make this decision by weighing out the pros and cons of each and determining what your business needs.

Advantages Of 1099 Independent Contractors And W2 Employees

Advantages of hiring 1099 contractors:

Advantages of hiring W2 employees:

Not Ready To Hire 1099 Or W2 Employees? Alternative Staffing Options

If you still can't choose between hiring 1099 contractors or W2 employees, some alternatives exist that can get you the best of both worlds. Temp agencies and professional employer organizations offer both options, and you have access to a pool of highly qualified workers, whom you don't need to worry about classifying as W2 or 1099.

When And Why To Hire Through A Temporary Agency

The best time to hire through a temporary agency is when you want to try out an employee before hiring them full time, or if you have a seasonal business and don’t want to have to pay an employee’s salary for the entire year.

When you go through a temp agency, there is no need to go through all the hassle of conducting a background check, processing payrolls, or conducting interviews because the agency does that itself. In addition, you won't even be charged for the employee's tax since, officially, the worker's employer is the agency and not you.

And while there may be additional costs that come by using a temp agency, those costs are counterbalanced by the amount of time you save. Find a temp agency with this directory.

How to get a Payroll Loan

Though working with an agency could potentially add a significant cost to the hiring of an employee, bear in mind that this cost should be amortized over the course of average length of employment for your typical employee.

As an example, let’s say that you hire an employee through an agency and the agency’s fee is 30% of the annual salary of the employee. Let’s also assume that the typical employee at your firm stays on for two years or more. When deliberating on whether or not that added cost is worthwhile, take that 30% cost and divide it by 24 months (two years). Given that small increase in monthly spend, you’re likely to not be influenced by the agency’s upfront cost and instead see the value of the employee more clearly as the fee is spread over the average two year term.

Many small businesses rely on small business loans, merchant cash advances, or term loans in order to onboard new employees, since the upfront cost to hire in today’s tight labor market can be daunting and quite impactful on a business’ cash flow. When deciding which small business lender to work with, take full advantage our our small business lender reviews and decide which lender works best with your industry, cash flow, credit type.

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