When it comes to hiring workers, businesses have two main options: 1099 contractors and W2 employees. It’s important to understand the difference between these two types of workers, as they can have significant implications for both employers and workers. In this article, we will explore the key differences between 1099 and W2 employees and the pros and cons of each.
Defining 1099 vs. W2 Employees
A 1099 contractor is an independent contractor who is self-employed and works on a project-by-project basis. They are responsible for paying their own taxes and do not receive benefits from the employer. On the other hand, W2 employees are hired by a company and work for the company on a regular basis. They are considered employees of the company and receive benefits and protections, such as workers’ compensation and unemployment insurance.
Key Differences Between 1099 & W2 Employees
One of the main differences between 1099 contractors and W2 employees is the level of control the employer has over the worker. With a 1099 contractor, the employer has limited control over how the work is done, as the contractor is self-employed and has the freedom to complete the work in their own way. On the other hand, with a W2 employee, the employer has more control over how the work is done, as they are considered an employee of the company and must follow the company’s policies and procedures.
Another key difference between 1099 contractors and W2 employees is the way they are paid. 1099 contractors are paid based on a project or contract, and their pay is usually negotiated upfront. They are responsible for paying their own taxes and typically do not receive benefits, such as health insurance or retirement plans. W2 employees, on the other hand, are paid a salary or hourly wage, and their taxes are deducted by the employer. They also receive benefits, such as health insurance, retirement plans, and paid time off.
6 Factors in Deciding 1099 vs. W2 Hiring
Flexibility
Hiring 1099 contractors can provide businesses with more flexibility in terms of staffing, as they can be brought on for specific projects or periods of time as needed, and projects can be distributed out to several 1099 employees at once without a significant increase in overall cost.
Hiring W2 employees can be less flexible than hiring contractors, as they are hired to work for the company on a regular basis, and while they can be effective on short-term projects, it’s important to keep their limits in mind given their static work schedule.
Control
W2 employees are subject to the policies and procedures of the company, which can give employers more control over how the work is done. A fully staffed W2 team is more likely to operate under a culture as defined by the leadership of the company within the confines of employee policies.
1099 contractors can provide businesses with less control over the work that is being done, as contractors have more autonomy over their work than W2 employees. Poor performance from contractors mostly comes through in the form of turnover, meaning the company leadership will need to spend valuable time finding new contractors to fill the gaps as poor performers are vetted out.
Cost
Small businesses often have tight budgets based on loans or other forms of investment. Since 1099 contractors are responsible for paying their own taxes and benefits, businesses can potentially save money on payroll taxes, benefits, and other expenses. Capping hours worked on projects and controlling billing cycles allows the employer to distribute the cost of their 1099 employees as needed to mee their budget constraints.
W2 employees are subject to payroll taxes and other expenses, which can be more expensive for employers than hiring contractors. While they come with the benefits of control, consistency, etc. W2 employees are protected under laws in most states to receive health benefits, paid time off, and more. On top of legal requirements, the job market is extremely competitive for W2 employees and companies need to offer competitive wages and benefits beyond what the job may be worth at a baseline.
Quality
Since W2 employees are regular employees of the company, good hires are more invested in the company’s success and should provide more consistent quality work. With management controls, quality of work typically doesn’t go through major changes very often on W2 employees who are well-managed and correctly compensated.
Depending on the contractor, the quality of work may not be consistent with the business’s standards or expectations. While employers can take measures to ensure quality control in their mix of contractors, it requires a significant investment of time and effort to keep these controls in place.
Legal Liability
Because 1099 contractors are self-employed, they are typically responsible for their own liability insurance, which can reduce the potential liability for the hiring business. This coupled with less government-related protections allows the employer to operate more freely while still getting the work completed.
Employers are responsible for ensuring that they classify their W2 workers correctly and follow labor laws and regulations, which can be complex and may result in legal penalties if not followed correctly. These employees have far more government protections, reducing the amount of flexibility businesses have when making budget and staff changes.
Skills
Last, but not least is a factor that both sides of this topic are capable of delivering in unique ways.
Because the hiring process for W2 employees is so competitive and often includes many candidates, employers have the opportunity to be very selective with who they hire. This process allows the company to select based on a range of specialization, whether the employee is hyper focused on one activity, or more generally approaching work from an entire department.
Hiring 1099 contractors can allow businesses to access specialized skills or expertise that may not be available in-house. This depends on the structure of the business, but contractors can often be a solution when a fast response or quick fix is in need and the amount of time required to hire a W2 employee isn’t available.
Deciding Whether 1099 or W2 is Right for You
In conclusion, there are several differences between 1099 and W2 employees that businesses should be aware of. We’ve covered a few of the most prominent ones in this article but it is essential that you review your legal requirements and have a strong understanding of what your business needs on a more detailed level before deciding.
While hiring 1099 contractors can provide flexibility, cost savings, specialized skills, and reduced liability, it can also lead to limited control, and inconsistent results. Meanwhile, W2 employees offer almost the inverse impact to your business. Whether you’re a small or large business, always consult experts before making a hiring decision.
