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1099 vs. W-2 Employee: Which Is Best for Business?

by YOSS Community Writer, on December 11, 2019 at 2:30 PM

Most businesses depend upon a large supply of labor, even if it is the business owner providing it. In fact, according to the BLS in 2008, wages made up between 18% (e.g., oil/gas) and 52% (e.g., health care) of all business operating expenses. So making the best use of wage expenditures can be the difference between success and failure.

One critical element of human resource management is the partitioning of traditional employees and self-employed contractors. They’re often labeled as 1099 workers and W-2 employees because of their tax status.


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What's the Difference Between 1099 and W-2 Workers?

It’s critical to understand the difference between 1099 and W-2 workers for many reasons. They are treated differently by the IRS and misclassifying can result in penalties, lawsuits, and other problems.

The term “1099 workers” stems from the fact that their compensation is reported via Form 1099-MISC. It is filed with the IRS and sent to the worker for their own use in tax filing.

Alternatively, W-2 workers are so-called because their compensation is reported via Form W-2. Various withholdings must be taken from W-2 workers, some (like half of FICA) are paid by the employer.

What most defines 1099 workers is their independence. They generally decide when and where they work, how they manage the work, and even whether to hire out some or all of the work to others. Unfortunately, there are exceptions to every one of these elements. For example, it is often the case that a contractor needs to work onsite or at specific times.

W-2 workers, in contrast, generally work employer-set hours and are managed much more closely. They are also provided with the tools and workspaces they need to do their jobs.

Benefits of 1099 Workers and W-2 Employees

Both 1099 and W-2 workers have distinct advantages. Let's go over them.

W-2 Employees

  • Greater availability: W-2 employees are more readily available, which means they can deal with emergencies and other sudden needs.
  • More stability: 1099 workers are ephemeral by nature. You can depend upon a W-2 employee to be around for the next year and beyond.
  • Greater loyalty: Being hired as an employee shows loyalty that is usually returned, so employees are more likely to notice business inefficiencies and work to fix them.
  • Reduced training: Employees maintain tremendous amounts of knowledge about your business' culture and procedures that 1099 workers will need to learn.
  • Easier management: You can more closely manage W-2 employees because you are allowed to by law.

1099 Workers

  • More flexibility: There is no long-term commitment to 1099 workers, so you can hire them to do exactly what you need and end your relationship with them without difficulty.
  • Less paperwork: 1099 workers require less accounting and other paperwork.
  • Reduced legal risk: You aren't as prone to lawsuits from work-related accidents or wrongful termination.
  • More specialization: Most contractors are specialists, which means it's easier to find the specialized skills you need with 1099 workers.
  • Greater self-management: 1099 workers will manage themselves and meet deadlines without your input.

Costs

One thing we haven't mentioned in comparing 1099 workers and W-2 employees is cost. This is because comparing them is difficult.

On the surface, it would seem that 1099 workers are cheaper. It isn't necessary to pay them benefits and they require less management. There's more to cost than this, however. Because of the lack of security and the costs of running their own businesses, 1099 workers tend to charge more than employees.

Under the right circumstances, such as a short-term and highly-specialized project, 1099 workers will be cheaper and better. When it comes to your workforce as a whole, you will need to balance the advantages of both kinds of workers.

Distinguishing 1099 and W-2 Workers

It can be tempting to classify workers as independent contractors. The truth is, it's just easier. Contractors run their own businesses and relieve you from time-consuming tasks like payroll and project management.

It's best not to jump to conclusions, however. There are many ways that misclassifying employees can harm you. You could owe back-taxes and penalties for non-payment of FICA, for example. You could owe back-pay and benefits to the employee. This is just the beginning. You could find yourself the subject of a costly lawsuit, which could then become public and tarnish your company's reputation.

To some extent, there is a Justice Potter Stewart aspect to the difference between 1099 and W-2 workers, "I know it when I see it." The IRS does provide guidance here. They offer three tests to determine if a worker is a contractor based on their degree of control and independence:

Behavioral

Do you control the worker and how they perform their work? This is not as clear as it may at first seem. Businesses and contractors need to coordinate work. However, the main point here is that the company should not be managing contractors' day-to-day work.

Another thing to remember is that relationships change over time. You must beware of gradually taking more behavioral control of a 1099 worker to the point where they become W-2 workers.

Financial

Financially, you should treat your contractors as though they are other businesses. This is true in terms of payments as well as expenses. It may seem expedient to reimburse a 1099 worker for an unforeseen expense, but this puts the status of your relationship in jeopardy. If such a situation arises, the contract should be renegotiated.

Type of Relationship

What type of relationship do you have with the 1099 worker? You should have a written contract that defines your relationship. It shouldn't look like an employment contract where behavioral and financial controls are found.

In general, the relationship should not involve providing employee-type benefits such as health insurance. Open-ended contracts can also be a problem, but an attorney can help you with this if you want to work with contractors over a long period.

Pay Attention to Statutory Employees

There is one other element to distinguishing between 1099 and W-2 workers: statutes. Statutory employees are people who would normally be independent contractors but who are treated as employees, like food-truck drivers paid on commission. There are also statutory nonemployees who would normally be considered employees but are treated as contractors, such as real estate agents.

Getting Help

If it isn't clear whether a worker is an employee or a contractor, the IRS can help. You can fill out a Form SS-8 and allow them to determine the worker's status. The main problem with this is that it can take many months to get a response.

Alternatively, you can hire an employment attorney. This is especially helpful if you want to structure a position so that it will be filled by a 1099 worker. Plus, you’ll get answers much faster than you can from the IRS.

Summary

According to a 2018 NPR/Marist poll, one-in-five jobs in America are filled by 1099 workers, and that number is likely to increase further over the next decade. We discussed some of the reasons for this. Freelancers provide you with greater flexibility and specialized talent than you can get from your normal workforce. They’re also easy to integrate into your existing structure.

Are you looking to augment your workforce with 1099 workers? At YOSS, we represent the very best pre-vetted talent in the world. We only engage with the top 1 percent of talent. So whether you are looking to fill a particular position or to shore up your talent pool, we can help.

Our mission is to make agile staffing easy for companies like yours so see how YOSS can help you manage or add to your workforce below with YOSS Talent Pools. 

Learn More About YOSS Talent Pools

Topics:Business InsightHiring GuideBusiness StrategyIndependent ProfessionalsWorker Classification

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