Have you found yourself in a dilemma when it comes to hiring your employees? There has been a controversy about whether workers are employees or independent contractors for a long time now. Both the 1099 employee and W-2 employee classification come with advantages, disadvantages, and business implications.
1099 vs. W2
When filing taxes, you need to identify whether your employees fall within the W-2s or 1099s tax forms. So what’s the difference?
A 1099 employee is a self-employed contractor who receives payment according to the terms of a contract and files their own taxes using the 1099 form.
On the other hand, a W-2 employee receives employee benefits and regular wages from their employer. The employer withholds their income taxes from their regular pay stubs and has a significant amount of control in terms of what work the employee can do. Look at a check stub template here to see how they differ.
1099 Employee Classification Explained
A 1099 employee is one that gets into a contract for a specific job. They are fully independent and can set their own working hours, use their own skills, and charge whatever they deem fit. At times they work for more than one business, and taxes can’t be withheld from their paychecks.
However, they don’t receive company benefits either, which is just about their biggest advantages. They cost much less compared to W2 employees, and they are well trained in their fields. They offer flexibility for businesses since they can be hired only when necessary.
On the other hand, employers lack control, and hence there may be a clash of interests. Working for a company only for a short amount of time may prove to be disruptive, and the contracts are usually binding. Employers may not be able to fire them at will since it may be a breach of contract. Since the company insurance does not cover a 1099 employee, they may sue the company upon injuries.
W-2 Employee Classification Explained
When you have an employee that you train, provide tools and working materials for, provide benefits for, pay a regular salary and withhold taxes from, then that’s a W2 employee. As an employer, you dictate what this employee does, and they have to follow your rules and regulations to stay in your company.
W2 employees are loyal to the company and look to hold their jobs long-term. It’s easier for employers to count on them during busy times as they can always work late or pitch in where necessary. Employers also have control over their schedules and job descriptions.
Hiring W2 employees means training, managing, and constantly motivating them to work. The employer must supply all tools necessary, and they are based on-site, so workspace is necessary too. Apart from wages, an employer must pay for employee Social Security, Medicare taxes, paid sick leave, and other employee benefits.
W2 vs. 1099: Why This Classification
W2 and 1099 are tax forms. Employers use W2 forms to file taxes for the employees they withhold tax from, while independent contractors use 1099-MISC forms to report their own taxes. Most employers misclassify their employees since independent contractors cost less compared to full-time employees.
If, however, employers are caught misclassifying employees as independent workers and denying them company benefits, unemployment taxes, medical taxes, and workers’ comp, they may face harsh penalties.
Which Is Better for Employee?
Generally, the employer has to decide which one works better for you depending on your business and your needs. Once you decide whether to hire a 1099 employee or a W2 employee, get familiar with IRS requirements to the taxes.
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