What's The Difference Between a W2 Employee vs a 1099?

June 25, 2019

What's The Difference Between a W2 Employee vs a 1099?

Doing business today isn’t always easy. When it comes to classifying your employees—in terms of the type of employment--this statement couldn’t be more accurate. Therefore, before deciding if you would rather employ 1099 contract workers or hire W2 issued employees, let us at Consolidated Personnel Services let us educate you on the differences between the two:

Primary Differences Between 1099 And W2 Employees

The following are three primary differences between the two main types of employment, those being W2 employees and 1099 independent contractors:

Tax Differences

  • W2: As an employer, you take on much of the cost associated with your employees when you hire a W2 issued employee. This means you fill out and file with your state and government associations, their unemployment insurance, worker’s compensation, Medicare and Social Security forms. You also will be responsible for taking Social Security tax, Medicare and state and federal taxes out of your employee's check.
  • 1099: Conversely, with a 1099 contractor, meaning you issue them a 1099, you don’t have to do payroll taxes. You are not responsible for unemployment, worker’s compensation or payroll taxes because you are “contracting” labor, not hiring an employee. That is why 1099’s are issued to independent contractors. You will have to file the 1099 form if your contractor earns over $600 yearly from you, but the sheer mass of what you are responsible for is vastly reduced with a contractor when compared with a W2 employee.  Be aware though that if you contract work for 30 hours or more a week for more than 90 days, the government will consider that person an employee. That means they can claim unemployment against you.

At Will Employment

Another significance between the two categories of employment is what is called at will employment. This involves your ability to fire or terminate the person.

  • W2: With a regular W2 employee, you are free to enact at will employment whenever you like. Of course, you still need to comply with state and federal labor laws. However, in general, if your employee breaks an agreement, you can terminate their employment.
  • 1099: With a contracted employee, such as a 1099 contractor, you have to pay special attention to the terms of any contract that might have been signed. In many cases, terminating such an employee will include a 5-10 day notice of termination from either side of the contract, meaning either on their end or yours.

Benefits And Pay

  • W2: Usually a W2 employee will be paid on a regular basis, at a certain time each month, bi-weekly, or weekly. Whatever you set up, it will often be regular and scheduled. Some might even have a salary instead of hourly income. Also, W2 employees are often given certain benefits like health care or vacation pay through your company.
  • 1099: You can compensate your independent contractor on a different schedule, even changing on a project-to-project basis. Your 1099 contractors will usually be paid hourly.

Help Classifying Potential Employees From The IRS

The Internal Revenue Service has compiled a list of three questions you should consider and answer before classifying a potential employee as a W2 employee or 1099 contractor. They are as follows:

  • Do You Control How They Do Their Job? A 1099 independent contractor lives up to their name, they are independent. This often means they come and go, and you won’t have too much say in “how” they do their job. A W2 employee though works for you. Therefore, you have much more control over what they do and “how” they do it. If control over an employee’s schedule and overall workload is important, you likely want a W2 employee. If not, a 1099 contractor will likely be fine.
  • Do You Control How They Are Paid? Do you plan on paying your employee yourself or are they paid by someone else through reimbursement, etc.? If you plan on paying your employee directly, a W2 makes sense. If your employee will send an invoice to get paid and/or they will cover their own expenses, a 1099 is likely your best choice.
  • Do You Have Long-Term Plans? Independent contract work often comes and goes with projects. Therefore, you won’t have long-term plans for this employee once the job at hand is complete. If this is the case, hiring a 1099 contract employee is likely best. However, if you want a long-term employee who will be with you for the long-haul, a W2 fits better.

Benefits of 1099 Contractors Over W2 Employment

For obvious reasons, many business owners love the idea of contract work. Less hassle for them as business owners. They save on wages, taxes, insurance, and benefits. When an employee isn’t considered an employee, there is no legal requirement for worker’s compensation or extensive tax requirements. It’s also harder to get sued by an independent contractor as many strictly “employment laws” don’t apply. However, this method of employment isn’t without its drawbacks…

Disadvantages of 1099’s When Compared to W2 Employee

With a general contractor, you will often be forced to pay a higher hourly rate for their services. It makes sense because they have to cover their own taxes, insurance, and other benefits, therefore they need to ask for more each hour. You also don’t have the benefit of a “team” environment. Independent workers might not even work in-office. The final disadvantage of a 1099 employee verses a W2 variety is their inability to be available on demand. Independent contractors often have several projects going at once in order the pay the bills, so they aren’t available at the drop of a hat, while your W2 employee will be committed to your company alone.

Contact us at Consolidated Personnel Services to learn even more about the drawbacks and benefits as it relates to issuing a W2 or 1099.

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