Want to learn the pros and cons of 1099 vs W2 workers for businesses? You’ve come to the right place. Today, we’ll talk all about hiring employees in-house (W2 workers) or going the independent contractors’ route (1099).
When it comes to workers, many business owners don’t realize that there is more than one type. In fact, each different type of worker has their own set of guidelines when it comes to how they work, how they deal with taxes, and more.
As a business owner, gaining an in-depth understanding of the difference between W2 and 1099 workers is important. It can make or break your companies success. Worry not – because in this article, we will go over everything you need to know about the pros and cons of 1099 vs W2 workers. We’ll explain what these two options are, their differences, and how to choose the best one for your business. Let’s not waste any time!
What is a W2 Employee?
Let’s start off by talking about W2 employees. This is what most people think about when work comes to their mind. Also known as payroll employees, these employees are typically the “default” when it comes to workers. The pay for these employees is typically at an hourly rate and they have a specific job that they need to do. Once hired, W2 employees typically work indefinitely until they quit or get fired. However, W2 employees have protections thanks to employment laws so if an employee is terminated it must not violate any protections they have.
The role that an employee will handle depends on what the company they work for determines. Companies control how and when the work gets completed by employees which gives the company full control! However, since companies have the say on how the work gets completed, they have the responsibility to provide training and tools for employees to use on the job.
It’s important to keep in mind that with W2 employees, they have basic employee benefits that they are entitled to like minimum wage, overtime protection, etc. Some other employee benefits that companies may offer (besides the basics like minimum wage) includes health insurance, vacation time, retirement plan contributions and more.
Now onto the tax side of things. When you think of a W2 employee, they are a payroll employee. That means a business owner will need to pay payroll taxes. Payroll taxes are taxes paid on the wages and salaries of employees. This includes medicare taxes, social security taxes, etc. The taxes paid are at a 50/50 split between the W2 employee and the employer.
What is a 1099 Worker?
Now that you know what a W2 employee is, you can learn about 1099 workers (also known as 1099 employees). When you think of a 1099 worker, you may automatically think of an independent contractor. Instead, there are multiple different types of workers that can be a 1099 like a freelancer, consultant, etc. However, one of the more popular options is an independent contractor. When a business owner is considering their options, this is a popular choice because these types of employees typically cost 30% less to hire.
On top of that, these employees are not protected by legislation so that means that there is no requirement for employee benefits or even employment taxes. That’s because 1099 workers like an independent contractor pay employment taxes on their own (known as self employment tax). This would include the standard medicare taxes, social security taxes, etc. The difference is that the employer will not have to worry about splitting them 50/50 like with payroll taxes since the employee handles all of them on their own!
1099 vs W2 Workers: Two Key Differences Businesses Need to Know?
Now that you understand the basics of each type of worker, it’s time to compare the difference between a 1099 vs W2 employee. There are some main differences to consider when comparing a 1099 vs W2 worker. But before we break down each of these, we want to discuss the two most important differences between these types of employees: protection and taxes. After all this, we’ll better be able to describe the pros and cons of 1099 vs W2 workers.
W2 employees are the ones that have some of the most protection. That’s because there are labor laws that specify employment protections. For example, there is the Fair Labor Standards Act (FLSA) that requires the federal minimum wage and specifies that it is $7.25, talks about overtime protections, and more.
On the other hand, 1099 workers don’t have these protections. That’s because labor laws like the FLSA don’t apply to this type of worker since they are technically not considered employees. In fact, there are plenty of people that may face a lack of protection from labor laws like:
- Employees at businesses that have less than 2 employees
- Some agriculture workers
- Employees at businesses that have less than $500,000 in revenue every year that do not take part in interstate commerce
Besides employee protections, the taxes play a big role in understanding the difference between a 1099 vs W2 worker. That’s because W2 employees are responsible for payroll taxes. That means taxes like medicare taxes (amongst others) are split 50/50 between the employee and the employer.
On the other hand, 1099 workers like an independent contractor are responsible for self-employment tax. This leaves the worker responsible for 100% of the taxes instead of leaving any responsibility to the employer.
Additional Differences Between 1099 Workers vs W2 Employees (How to Tell Them Apart)
Now that you understand some of the differences a bit more between these two types of workers, you will want to make sure you can tell them apart. It can be a little tricky, especially since they may do some similar tasks in the business. However, the Internal Revenue Service (IRS) understands that it can be hard for business owners to figure this out. That is why they have an online source that may be able to help people understand the difference when classifying their workers.
We want to remind you that even though there are resources online that can help you understand what type of employee you are dealing with, the best way to determine this is by speaking to a professional. A professional like a tax advisor, a business consultant, or even the IRS directly can help you properly classify your workers. Now that we got that out of the way, let’s focus on some “common law” rules that apply to understanding workers which are:
This factor can help an employer identify their workers. That’s because the behavior allowed for a worker will depend on the type they are. Some factors of behavioral control include types of instructions given, evaluation systems in place, and the training. Each of these factors of behavioral control can impact how they are classified. Let’s take a deeper look!
- Types of Instructions Given: A W2 employee can expect to be subject to business instructions about how, when and where to work. A 1099 employee, on the other hand, has more flexibility in their day-to-day. As a general rule of thumb, the more detailed the instructions then the higher the chance that the worker is considered a W2 employee. When a worker is more independent, they are typically a 1099 worker.
- Evaluation Systems in Place When you have systems in place that can measure how the work is done by a worker then you may be dealing with a W2 employee. However, any evaluation system doesn’t automatically point to a W2 employee. Instead, there can be evaluation systems that measure aspects like the end result which could show that the worker is a 1099 worker like an independent contractor.
- The Training Think of 1099 employees as people that already come in with a certain level of expertise. That means that they shouldn’t need much training in order to help you accomplish the goals you have for their role. However, you’ll typically have to do some more training for a W2 employee.
Now that you understand the behavioral factor that goes into determining the type of worker you are dealing with, let’s move onto the financial factor. The financial side of things looks at the control that a business has when it comes to the economics of the worker’s job. Some factors of financial control include investments, unreimbursed expenses, and method of payment.
- Investments: Generally, a 1099 worker (independent contractors) will have to put a significant investment towards the equipment they use. There is no dollar amount rule when it comes to this factor but it is still something to be aware of.
- Unreimbursed Expenses: It’s not uncommon for a 1099 employee like an independent contractor to rack up expenses that need to be reimbursed. That is why if there are a lot of unreimbursed expenses then you may be dealing with when you have a 1099 employee. However, it’s also important to note that unreimbursed expenses are not exclusive to 1099 employees. That’s because a typical W2 employee could still rack up unreimbursed expenses in connection to the job they perform for their employer.
- Method of Payment: Another factor to consider is the method of payment. That’s because typically a W2 employee is usually paid at an hourly rate. However, they could be paid by other time increments like a weekly rate, or any other period of time rate. On the other hand, a 1099 employee like an independent contractor is usually paid with a flat fee but they can also be paid hourly as well.
Type of Relationship
Last but not least of the “common laws” is the type of relationship that the employer has with the employee. It can be confusing understanding the relationship between these two parties but can be easier to understand when you consider factors like written contracts, benefits for the employee, permanency of the relationship, and whether or not the services provided are a key part of the business.
- Written Contracts: Even if the written contract specifies the type of employee, that is not all the IRS will use to determine if that’s actually the case or not. Instead, the details in the written contract like how both parties will work together is what the IRS would look at to determine the type of worker.
- Benefits for the Employee: 1099 employees are not protected by labor laws. That means benefits like overtime protection, workers compensation insurance, health insurance, pension plans, paid vacation, sick days, and more are reserved for W2 workers – independent contractors typically have to figure these things out on their own.
- Permanency of the Relationship: 1099 workers are often hired just for a specific project with a set timeline. However, if the worker is hired and expected to continue indefinitely, they would likely be considered a W2 employee.
Pros and Cons of 1099 vs W2: Which is Better to Hire for Your Business?
The best option for you to hire will depend on your exact situation. That is why you would want to talk to a professional. The best way to determine how you should go about hiring employees is by breaking down the pros and cons. So, read on below as we detail the pros and cons of 1099 vs w2 workers.
Pros & Cons of 1099 Workers
The advantages of going with 1099 workers include:
- Tax Benefits: There are serious tax benefits that employers get when they choose to hire a 1099 worker. That’s because these workers are subject to self-employment tax – you’re not on the hook for nearly as much tax liability.
- More Affordable Business Expenses: On top of the fact that 1099 employees handle 100% of the taxes that they need to deal with, they are also a more affordable hire. Hiring a 1099 worker is generally 30% less expensive for employers.
- Reduced Legal Risk: 1099 workers do not have protection from labor laws. Typically, these types of workers are unable able to file wrongful termination claims. This results in a reduced legal risk for the employer.
Now – in saying all this, here are some of the disadvantages of 1099 workers – or independent contractors.
- Not as Much Control: Think back to how the IRS defines a W2 employee. One of the biggest factors relates to the level and type of control that employers have. That means you have far less control over 1099 workers and independent contractors.
- Hiring Agreements Can be More Complex: You want to make sure that the agreement that you have with your 1099 worker is air tight! That’s because if an employer breaches the contract, it can lead to issues.
- Potentially Deal with Government Audits: Dealing with audits can happen whenever. However, employers that have 1099 workers may deal with them more. Why? Well because W2 employees are easier to track and monitor from the agency standpoint. Some agencies that may try to conduct an audit include OSHA, NLRB, IRS, US Department of Labor, and more.
Pros and Cons of W2 Employees
After learning about the pros and cons of 1099 workers, you will want to make sure you understand the pros and cons of W2 employees. Some of the pros include:
- Higher Level Of Control: Unlike 1099 workers, there is no limit to how much control a company can have when it comes to the work of their employees. The employer can dictate how the work is done, when it is done, what equipment will be used to accomplish it, etc.
- Better Productivity: W2 employees may be more productive than someone that doesn’t get the same level of benefits. They’re not as personally and emotionally invested in the wellbeing of your company – and thus, it’s generally believed that W2 employees work harder for you.
Cons of a W2 employee include:
- More Expensive Since W2 employees can get benefits and protections from labor laws, it costs more money to handle that. For example, if a company provides health insurance coverage, then they will need to deal with that expense for all their employees.
- More Taxes: Unlike 1099 employees that have self-employment tax that they need to deal with, W2 employees only need to deal with half that amount. That’s because the taxes they are responsible for are split 50/50 with the employer.
What’s Better: 1099 or W2 Employees?
Now that you now all the pros and cons of 1099 vs W2 employees, you should feel confident in your decision. For businesses looking to save money or gain help for quick, one-off projects – 1099 workers (independent contractors) make more sense. However, if you want an employee that’s more invested in the wellbeing of your company – and that you have more control over – a W2 employee is what you want. Just know that you are going to pay for it in benefits and taxes!
FAQs (Frequently Asked Questions) about the Pros and Cons of 1099 vs W2 Employees
We’ve talked all about the pros and cons of 1099 vs W2 employees. By now, you should have an in-depth understanding of which of these types of employees makes the most sense for your business. And, if you’re considering making the jump from W2 employee to 1099 worker, we hope this article helped you gain insights on what you need to know – and what you can expect come tax season!
Understanding the difference between a 1099 vs W2 worker can be confusing for a lot of people. That is why there are commonly asked questions that others have had when learning about this topic. These questions may be some that you have after reading the information above!
Do 1099 or W2 Workers Pay More Taxes?
Since 1099 workers are seen as self-employed, they have a self-employment tax rate. This self employment tax rate is 15.3% overall. It consists of two parts which are:
- 12.4% for Social Security
- 2.9% for Medicare
Individuals that are 1099 workers are responsible for 100% of these taxes. The same tax rate applies for W2 employees of 15.3% overall (which is 12.4% for Social Security and 2.9% for Medicare). However, they are split up differently. W2 employees would be responsible for:
- 6.2% for Social Security
- 1.45% for Medicare
The other 6.2% and 1.45% is the responsibility of the employer!
As an Employer, Do You Need to Pay Income Taxes for 1099 Workers?
No! Employers do not need to pay income taxes for 1099 workers. Instead, 1099 workers are responsible for their self-employment tax and income tax on their own.
Is an Independent Contractor a 1099 Worker or a W2 Employee?
An independent contractor is an example of a 1099 worker.
Will an Employer Withhold Income Taxes?
Employers have the responsibility of withholding employment taxes from their employees which includes federal income taxes.
Wrapping up the Pros and Cons of 1099 vs W2 Workers
There you have it – all the W2 vs 1099 pros and cons. We’ve answered the main question you came here with – what’s better: 1099 or W2? Your business is unique, and thus, the answer to this question is unique. But since we’ve armed you with the necessary information, you should feel confident in making the right choice when hiring employees for your company.
A W2 employee is what most people think of when it comes to a standard worker. This is a different type than a 1099 worker. Some key differences between these two options comes down to how they handle protections, and taxes. It can be a little tricky telling them apart. Some ways that you can are to look at factors like:
- Behavioral Control
- Financial Control
- Type of Relationship
We want to remind you that even though there are resources online that can help you understand what type of employee you are dealing with, the best way to determine is by speaking to a professional. A professional like a tax advisor, the IRS, or a business consultant can help you properly classify your workers. This isn’t something you want to get wrong as it directly affects your taxable income – so reach out to a professional if you have questions!