1099 Contractor vs W2 Employees
There is no such thing as a contract employee
The decision between hiring 1099 contractors or employees is fundamental for any business. Each option has its own set of advantages and disadvantages, which can significantly impact your business operations, costs, and overall success.
A 1099 contractor, often called an independent contractor, is an individual or entity hired to perform specific tasks or projects for your business. Here are some key points to consider when working with 1099 contractors:
Flexibility: 1099 contractors offer flexibility. You can hire them on a project-by-project basis, which allows you to scale your workforce up or down as needed.
Tax Responsibility: Contractors are responsible for paying their own income taxes, Social Security, and Medicare taxes. You do not withhold taxes or provide benefits like health insurance.
Control: You have less control over independent contractors' work schedules and methods. They are generally self-directed and responsible for their own work.
Costs: While you might pay higher hourly rates to contractors, you can save on costs associated with benefits and payroll taxes.
Hiring employees involves a more traditional employer-employee relationship with a permanent commitment to the worker. Here's what you need to know about hiring employees:
Consistency: Employees provide consistency and stability to your business. They work for you continuously and are typically committed to your organization's goals.
Tax and Benefits Responsibility: As an employer, you withhold income taxes, Social Security, and Medicare taxes from your employees' paychecks. You also provide benefits such as health insurance, paid time off, and retirement plans.
Control: You have more control over employees' work schedules, tasks, and methods. You can guide and supervise their work.
Legal Obligations: Employers have legal obligations, including compliance with labor laws, minimum wage requirements, and ensuring a safe working environment.
Key Considerations When Choosing
Ultimately, the decision between 1099 and W2 is a tax question. The IRS says, “In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.”
The IRS makes three primary considerations when determining whether you have an employee or contractor {Note, I said the IRS, not the business or the worker}.
“Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”
Misclassification is serious, and the employer is held liable for the decision. If you still aren’t sure, reach out to EBR or another HR Expert for answers, or send the SS-8 Form to the IRS and they will provide guidance.