When it comes to hiring new staff, there are two types of workers that you may encounter: W2 employees and 1099 contractors. Both have pros and cons, so it’s essential to understand which is best for your business.
When hiring a W-2 employee, you have more control over their work because you set their hours, provide tools and training, and pay employment taxes. You also offer benefits like health insurance and paid time off.
A 1099 worker is a self-employed person or independent contractor who earns money in addition to their income. They receive a tax form called a 1099-NEC to report their earnings to the IRS each year. These employees need to receive payroll taxes or employer-paid benefits like health insurance and paid time off, which can be more expensive for independent contractors to provide.
The IRS uses several factors to determine whether a worker is classified as 1099 vs w2 employee. These factors include behavioral and financial considerations.
Behavioral: Does the company control the way the worker performs their job? For example, does the company provide the tools and supplies they need for their work? If you provide the tools, training on how to use them, and benefits like vacation pay or overtime pay, the IRS will likely classify the worker as a W-2 employee.
When a contractor provides services to clients, they usually sign a contract that details their terms of payment, expectations, and penalties. This is helpful because it helps ensure both parties are on the same page. It also makes it easier for you to terminate them if you no longer need their services. However, if you’re hiring a contractor, it’s essential to have a trusted legal professional review the contract to make sure there aren’t any legal issues you might run into.
A W2 employee is a worker you hire to work for you at least part of the time. They receive a Form W-2 each year, which reports their wages and the taxes they were withheld from those wages. Employers must provide these forms to their employees by January 31st of each year.
Employees are also subject to employer-sponsored benefits like health insurance, retirement plan contributions, and paid time off. This can make them more expensive than independent contractors but also give you access to a broader range of talent.
Moreover, employees are more committed to your business. They often stay with your company for extended periods, meaning they can become better integrated into your team and culture and contribute to a more vibrant workplace environment.
As a result, they may be more willing to jump from one project to the next or wear multiple hats, which can help them stay focused on their goals and keep morale high. While finding a good fit for your business can be challenging, you can improve recruitment and retention by targeting potential employees who match your brand, company values, and objectives.
All payroll taxes are automatically withheld from W-2 employees’ paychecks and paid to the government on their behalf by the employer. Contractors handle their payroll taxes, which must be paid every quarter and submitted to the government.
W-2 roles instruct employees on how, when, and where they accomplish a job. Workers who perform tasks or work on particular projects will fall under 1099. Independent contractors can support themself without the help of an employer.
The IRS has guidelines that businesses can use to determine if they should classify a worker as a W2 or 1099 employee. This classification is determined by behavioral and financial factors, including how much control the company has over the work that is being done and how it is done, and who provides the tools, supplies, and training for the job.
Benefits of Hiring a 1099 Worker
Besides the fact that 1099 workers don’t have to worry about taxes, they also enjoy a lot of flexibility. They can set their schedules and take time off to go to the gym or spend time with their family. This gives them a healthier work-life balance, which helps them produce better results for your business.
If you’re an employer, consider hiring 1099 workers because they can be an excellent addition to your team. They may have a more complex skill set than your other employees, which makes them a perfect choice for projects that don’t require a full-time employee.
However, hiring a 1099 worker comes with some disadvantages as well. The IRS views independent contractors as nonemployees, which means they don’t receive the same benefits and payroll deductions as your other employees.
They also need access to employee-type benefits, like health insurance and 401(k) plans. Additionally, they have different access to training and certifications than employees do.
As a result, it’s essential to understand the type of worker you’re hiring before starting. This will help you avoid common mistakes that can get your company into hot water with the government and cause you to pay heavy penalties.