1099 vs W2 Employees: The Key Differences Explained 

When it comes to hiring a worker for your business, you are often faced with a dilemma: do you onboard this new hire as a contractor or as an employee? One of the biggest hassles is figuring out whether you will have to provide this new hire with a 1099 Form or a W-2 Form during tax season.

Ultimately, it depends on the obligations of the worker and the obligations you as an employer wish to undertake.

But which is the best decision for your new hire? To decide this, you need to know the difference between 1099 vs W2 workers.

We’ve prepared this guide to help you out.

Differences Between 1099 vs W2 Workers

The first step is to always make sure you are aware of the tax deadlines for businesses. Next, you have to look at the kind of work you will give this new hire. The work and the time you require of them will help you determine which classification works better for them and your business.

Here’s what you need to know:

Contractor

A 1099 worker is a contractor. They fulfill a specific role or even work on a specific project or task. Often, temporary workers are contractors. 

Contractors will usually set their own hours. They are usually not obliged to work the standard forty-hours per week. Their work might consist of projects that can be finished in a short duration or a long duration – often depending on their pace of work. They are usually not classified as either ‘full time’ or ‘part-time.’

Contractors are also responsible for paying their own taxes. As a result, this takes a huge burden off the employer’s shoulders. If you do hire a contractor, you want to encourage them to consider this great 1099 online filing service.

Employee

An employee is hired to work a determined set of hours per week – 40 hours for a full-time employee and anything under 40 hours per week for a part-time employee.

As an employer, you can dictate when your employees have to work and what they work on. You can require them to come to an office, attend meetings, and to work on a particular assignment at a particular time. You are required to provide them with a W2 during the tax season.

Your obligations will include withholding taxes from their wages. This should be reflected in the pay stubs that you provide them.

So how do you decide whether your new hire should be a contractor or an employee?

Level of Control

Ultimately, deciding on whether your new hire should be a contractor or an employee depends on the level of control that you wish to exercise over them.

According to the IRS, these are the three factors that help you determine the level of control you have over your workers.

The first is behavioral.Do you have the right to control when your worker completes their work and how they complete the work?

The second is financial.Are the financial obligations that the worker needs to be paid by them or by you? Are you paying for their computer? Are you financing any expenses needed for them to complete their work?

The third is the type of relationshipthat you have with them. How important is the work that they do for your business? Is there a sense of urgency with the work they do? Do you provide them with any benefits such as health insurance?

The lower the level of control, the more likely you are to hire them as a contractor. If you have greater control, then you should hire them as an employee.

Generally speaking, the law requires most workers to be classified as employees. They have to meet certain requirements to be classified as contractors.

Pros and Cons of Contractors

So what are the pros and cons of hiring a contractor versus an employee? What’s the real difference between 1099 vs W2?

With contractors, you have less control (as we have discussed) and this means you will have to be very selective with whom you hire. You won’t be able to look over their shoulder to make sure they are working so choose wisely.

On the flip side, contractors are usually experts in their field. Contractors are usually self-disciplined. If you are hiring for an entry-level position, then you may want to go for an employee whom you can train and prepare.

You also won’t need to finance any of a contractor’s expenses. If their laptop needs repaired, they are required to pay for the repair so they can continue the work. This takes a huge financial burden off your shoulders.

However, you also need to know that you cannot fire a contractor on a whim – as you have to ensure there is no breach of contract. You will have to hire a lawyer to prepare a contract that works for both parties.

Pros and Cons of Employees

One of the biggest advantages of an employee is that they are usually loyal to your company. Employees wish to rise up the ranks within your organization. They are interested in having a great resume – and they know that spending years within an organization is a huge plus.

The main disadvantage is that you will be responsible for training, onboarding, and tax obligations for your employees.

Employees are keener to learn the different aspects of your business. Especially if you are a startup, you can depend on an employee to wear multiple hats and work in multiple roles.

You can depend on them to work overtime when needed. You will have to make sure, however, that you provide them with resources to learn their role (and others). If you require them to work overtime, you will likely need to pay additional wages and often at a higher rate.

You have greater control over their work and hours. This does mean that you will have to dedicate time to answer their questions. You cannot be completely ‘hands-off.’

Hire Away

Now that you know the difference between 1099 vs W2 workers, you can make the best decision on how to classify your workers. Best of luck with the onboarding process!

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