As a business owner, hiring capable staff is a primary responsibility. But there’s more to the process than finding qualified candidates.
Choosing between W-2 employees and 1099 independent contractors can have a real impact on operations and your bottom line. Here’s a simple guide that covers the high-level basics, to help you make the right choice for your unique business.
Identifying your goals
Outlining what you are hoping to achieve from the hire is the first step towards making an informed choice. Think about the following criteria below and how they relate to your needs:
Cost - Are you looking for the lowest cost option?
Skill Level - Do you need specialized expertise to solve a specific problem?
Commitment - Do you need part-time or full-time help?
Involvement - How deeply do you want the worker invested into making business decisions?
Longevity - How long do you wish the relationship to last?
Training - Does the job require a large investment in training and development?
Control - How much control do you wish to maintain over the worker’s schedule, hours, pay rate and outside employment?
Location - Will the worker complete tasks on your premises, using your equipment?
Remember that it’s not one or the other. Many businesses hire both W-2 and 1099 staff, depending on the position or circumstances.
Advantages and disadvantages of 1099 independent contractors
PROS
While hourly pay is higher, the overall spend is often lower as employers are not required to pay the employer portion of FICA and other benefits such as workers’ compensation insurance.
Ideal for project work, seasonal back-fill or part-time help.
Not protected by overtime rules.
Freedom to end engagement at any point for no reason.
Do not require payroll tax withholding.
Typically have less regulatory burden.
CONS
Flexibility comes at the cost of stability.
Weaker, non-committal relationship.
Worker maintains more control over their pay, hours, workflow, work location, etc.
Not a good fit for tasks core to your business function.
Investments in training/development may not be worthwhile.
Advantages and disadvantages of W-2 employees
PROS
Easier to control on a day-to-day basis.
More focused and dedicated to your business over the long run.
Ideal for completing core business tasks.
Can develop into more valuable team members with training and career development.
Zero risk of making a mistake with employee classification.
CONS
Higher costs outside of hourly pay, including FICA taxes, health care and workers’ compensation insurance, retirement programs and other benefits.
May require more training and management in the beginning.
Increased legal complexity as W-2 employees are protected under the Fair Labor Standards Act (FLSA).
More difficult to terminate.
Understanding IRS classifications
Note that how a worker is classified is not always up to the employer. Just because you choose to pay a worker using a 1099 and title their position as a contractor doesn’t mean that they automatically do not qualify for W-2 rights and protections.
Only the Economic Reality Test will be considered when making a final determination of worker classification. The Economic Reality Test determines if the worker is economically dependent on the employer for work or in business for themselves.
It is very important to make sure you only treat legitimate independent contractors as 1099s. Misclassifying employees can lead to heavy penalties and potentially be catastrophic for your business.
Need help making a decision?
Understanding the difference between 1099s and W-2s is a great first step, but if you’re still not sure which worker type is best for your business, an Iota Financial CPA is available to help.
We’ll talk through your specific goals and needs and come up with a staffing strategy that works for you.
