Understanding the distinction now can save you in the long run.

 

Whether you’re an established business or a budding startup, one thing for certain is, running a business isn’t always as straightforward as you might think. Especially when it comes to classifying your vendors, contractors, and employees—in regards to the type of employment. Consequently, before determining if you would preferably hire1099 contractors or employ W2 assigned employees, here are some helpful distinctions between the two:

Principal Differences Between 1099 Contractors and W2 Workers

The following are 3 chief differences between W2 workers (standard employees), and 1099 independent contractors: 

Tax Differentiation

• 1099:, With a 1099 contractor, implying you issue them a 1099, you do not have to do payroll taxes. Additionally, you aren’t liable for unemployment, worker’s comp, or payroll taxes because you’re “contracting” work versus “hiring” an employee. This is why 1099’s are assigned to independent contractors. You will have to file the 1099 if your contractor earns over $600 annually from you, but the absolute size of what you are liable for is greatly reduced with a contractor in comparison to a W2 worker. Be cognizant that if you contract work for 30 or more hours a week for over 90 days, the government will recognize that person as an employee. That indicates they can claim unemployment on you.
• W2: You, as an employer, absorb an abundance of the cost connected with your employees when you hire a W2-issued employee. You must fill out and file with your state and government organizations, their unemployment insurance, worker’s comp, Medicare, and Social Security forms to name a few. You’re also liable for exercising Social Security tax, Medicare, and state and federal taxes out from your employee’s check.

At-Will Employment

Another consequence separating the two sections of employment is what is called at-will employment. This includes your capacity to fire or terminate the employee.

• 1099: For example, with a 1099 employee, you must pay specific attention to the span of any contract that has been signed. In many circumstances, terminating such an employee will carry a 5-10 day notification of termination from both sides of the contract, indicating either on their end or yours.
• W2: With a conventional W2 employee, you are unconstrained to invoke at-will employment whenever you wish. Of course, you still want to comply with state and federal labor laws. Nevertheless, if your employee violates an agreement, you may terminate their employment.

The Benefits And Pay Factor

• 1099: You can compensate your 1099 contractor on a modified schedule, also rotating on a project-to-project basis. Your 1099 contractors are typically paid hourly and can be paid on a project basis as well.
• W2: Ordinarily, a W2 employee will be compensated regularly, at a specific time each month, bi-weekly, or weekly. Whatever the agreement was, it will usually be routine and scheduled. Some may even have a salary rather than an hourly income. Additionally, W2 employees are oftentimes given specific benefits such as health care or vacation pay by your company.

Assistance Classifying Likely Employees From The IRS

The Internal Revenue Service has collected a list of 3 questions you should contemplate and answer before classifying a possible employee as a W2 or 1099 contractor. They are as follows:

• Do You Examine How They Perform Their Job? A 1099 independent contractor is self-explanatory, they’re independent. This oftentimes suggests they come and go, and you won’t input in “how” they perform their job. A W2 employee works for you. Hence, you have considerably more control over everything they do and “how” they do it. If authority over an employee’s calendar and overall workload is significant, you likely require a W2 employee. If not, a 1099 contractor will be the route you opt for.
• Do You Control How They Are Compensated? Do you plan on compensating your employee yourself, or are they paid by another person through reimbursement or other means? If you intend on paying your employee directly, a W2 makes sense. If your employee will give an invoice to get paid and/or they will cover their own expenses, then a 1099 is your best choice.
• Long-Term Plans? Independent contract tasks frequently come and go with projects. As a result, you won’t have long-term plans for this employee once the project is concluded. If this is the case, hiring a 1099 employee makes the most sense. Though, if you require a long-term employee that will be with you for the long haul, a W2 fits the bill perfectly.

The Benefits of 1099 Contractors Versus W2 Employees

For apparent reasons, several business owners prefer the idea of contract work. A limited nuisance as business owners. They save on contracted compensation, insurance, taxes, and other benefits. When an employee hasn’t been deemed an employee, there is no legal provision for workers comp or comprehensive tax obligations. It’s also more difficult to get sued by an independent contractor as many strict “employment laws” don’t apply. Still, this method of employment isn’t without its disadvantages.

Disadvantages of 1099’s in Comparison to A W2 Employee

With a general contractor, you will usually be required to pay a higher hourly rate for services rendered. This rationale is because they have to cover their taxes and insurance among other things, and consequently, demand more per hour. Additionally, they don’t have the advantage of a “team” environment. Independent workers may not even work in-office.

The last disadvantage of a 1099 employee versus a W2 type is their inability to be ready on demand. Independent contractors may have numerous projects for different companies in progress, so they may not be available when needed, while a W2 employee will be committed solely to your company.

For more information about the disadvantages and benefits of issuing a W2 versus a 1099, contact Adeptus Partners to speak with one of our tax professionals.