New employees mean good news for your business—right? You’re growing and thriving, and that’s an amazing goal to hit. On the other side of adding those new employees is the paperwork—a seemingly endless stream of documents to let you know the type of employee you’re hiring. The perfect example? A 1099 vs. W-2 employee.
Which one do you need? Are your employees full-time or independent contractors? Do you know which employee type is the best for your business right now?
These are but a handful of questions to emerge before, during, and after the hiring process to get the right person to do the job you need them to. It’s important, nonetheless, to classify your employees for payroll so they get paid properly, and can do their taxes correctly.
We’re going to dive deep into the world of employee documentation with the ultimate guide to 1099 contractors and W-2 employees. We’ll cover the following: the difference between the two, benefits and challenges of each, what the tax implications are, and some real-world examples to help you decide which employee type is best for your small business.
What is a W-2 employee?
A W-2 employee is a worker employed at your small business in either a full-time or part-time capacity, and participates in company benefit programs, vacation or PTO, health insurance, and overtime pay. While this type of employee is largely on salary, if they’re paid hourly, they need to at least be receiving minimum wage.
W-2 employees are hired for an indefinite period for a role that has consistent, on-going work. This employee type must adhere to company rules around scheduling.
What is a 1099 employee?
On the other hand, a 1099 employee is a contractor without a fixed company. They’re not expected to perform or show up in the same way as a full or part-time employee. A 1099 employee can be categorized as a freelancer, contractor, gig worker, or a consultant. They don’t get the same benefits as a W-2 employee, like health insurance or paid time off.
This worker is usually hired for a specific task or project. They’re often self-employed, and you don’t need to handle their taxes.
What is the difference between 1099 vs W-2 employees?
A lot of 1099 vs W-2 employees come down to tax differences for your employee and your business, managing these employee types, and the benefits these employees are eligible for—or not.
Taxes
If you’ve got a W-2 employee, you’re going to withhold income tax, and withhold and ensure payment of Social Insurance and Medicare taxes. You’ll also need to factor in unemployment wages for your W-2 employee.
We’ll dig in further to the specific tax implications between these two employee types (and their tax forms) but this is the key tax difference. Any 1099 contractor or gig worker doesn’t need to have these taxes factored into their pay.
Employee management
This is a fairly simple difference, but the freedom and flexibility of one employee type over another is still confusing.
W-2 employees are your direct employees. They report into specific people at the business, have set hours, benefit from programs set-up for professional success and career development—among lots of other things. On the other hand, 1099 employees aren’t full or part-time contract or permanent employees. Because their role is often designated to a specific project or sprint, they don’t have the same schedule, more often than not, they set their own hours, and aren’t required to follow the same performance metrics.
Social benefits
Because 1099 contractors are more or less deemed as self-employed, they don’t need the same benefits a small business may provide. This includes health or lifestyle benefits, perks, or vacation time. Your W-2 employees, on the other hand, are required to have some kind of social benefit—be it paid vacation time, health benefits, or additional perks specific to the business.
What are the benefits and challenges of W-2 employees?
Why you’d elect to have a W-2 employee over a 1099 contractor is entirely up to the needs of your business and financial bandwidth. There are a lot of benefits that come with having W-2 employees at your business, but there are some challenges, too.
Below, we have a few pros and cons of the W-2 employee type to help you make an informed decision.
Challenges of W-2 employees
Having resources on hand
Depending on what your business needs are, you’re more likely than not going to have to supply this employee type with tools to perform their job. This could be anything like physical tech, like laptops or monitors, to retail resources like training sessions.
These employees are generally going to be based on-site at your business (again, depending on industry type and need) so you’ll need to ensure there are sufficient supplies for them to perform their work—along with everyone else at the business.
Potentially high costs
W-2 employees are more of an investment. Not only are paying them their salary, but you’re tasked to pay for health insurance, benefits, perks, and perhaps paid sick leave. Not only do social benefits come at a cost that you need to factor in, what about professional development opportunities? This can be added to the cost too, if you intend to offer it.
Managing employees
Managing W-2 employees is both a benefit and a challenge. Scheduling, training, and paying W-2 employees can be fairly time-consuming as a small business owner. There’s a big difference between doing the actual work you need to do and managing employees. Ensuring your employees are on task, on schedule, and properly prepped and trained for their shifts or work for the day becomes more of your job than any other task.
Benefits of W-2 employees
Company loyalty
In a lot of ways, having W-2 employees will speak to your company’s commitment to workers and your workers to your company. Employees tend to have more company loyalty and affection if they have more permanent, scheduled employment opportunities. Workers strongly identify with their job and the tasks they perform day-to-day, and lean toward jobs that are more personally fulfilling and have more financial security.
Consistent support
Contractors work for a specific time frame on projects or tasks, while W-2 employees work for as long as you both mutually decide—which could be years! You can count on your employees to see your business through all levels of activity—from seasonal spurts to regular sales.
With this ongoing, consistent support, you can count on your longer tenured employees to have past context, too, that will help in ensuring customers’ needs get met and the business doesn’t suffer.
Control over their work
Control over this employee type’s work is where the benefit comes in. Managing employees can take a toll, but there is a sense of relief in reliability around scheduling and task management, among many other things.
What are the benefits and challenges of 1099 contractors?
There comes a certain degree of flexibility and cost-efficiency when it comes to 1099 employees. You only really need to have this type of worker for a specific period of time or project.
But if you’re going to use 1099 contractors, get to know what some of the other benefits and challenges may be. Below are the common pros and cons of 1099 contractors.
Challenges of 1099 contractors
Less control
Small businesses that have permanent or longer-term contract employees have a stronger degree of control over how those workers perform and show up for those tasks. 1099 contractors, on the other hand, don’t have to follow the same set of rules. They usually work for the business for a short amount of time. That business isn’t usually their primary commitment for finances, so contractors don’t need to follow the same degree of loyalty.
In a lot of ways, employers must work within the schedules and availability of 1099 contractors.
Insurance management
If a 1099 contractor is required to do physical labor, in the event of injury, the small business doesn’t provide coverage for them. W-2 employees are covered by the business, and are entitled to worker’s compensation. It’s important to look into what coverage a 1099 contractor may have on their own independently, and what your small business may need just in case.
Legal considerations
While 1099 workers don’t follow the same set of rules or controls that W-2 adhere to at a business, they do usually sign a contract and follow those obligations. 1099 workers are also considered freelance or self-employed. They may have their own documents to ensure they’re covered in case of a breach of contract.
In any case, consider what legalities need to be covered before onboarding a 1099 worker.
Benefits of 1099 contractors
More flexibility
A 1099 worker’s flexibility is one of the most essential benefits for both them and an employer. They are ideal for employers who seek out workers for specific tasks—which can include project-based work or seasonal employment.
You can set out the parameters of the opportunity based on your business need and how long you estimate the project running for. Then hire and end contracts when you see fit.
Cost-efficiencies
With W-2 employees, there are added costs that goes into hiring, training, and retaining them. 1099 workers don’t have the same expectations. Because they’re not your traditional employees, you don’t need to worry about training costs, professional development funds, or even withholding taxes from them.
Contractors are paid based on a set contract, often per project, per piece, or per hour. This means you don’t need to worry about salary or hourly wages that run yearly.
Expertise and specialization
A 1099 worker is usually less of a generalist. That makes them ideal to hire out for specific projects. 1099 workers specialize in niche fields that make them desirable for specific tasks.
1099 vs W-2 taxes: What are the implications?
The tax implications on these types of workers are very different. When it comes to W-2 employees, you’ll need to withhold Social Security, Medicare, federal unemployment taxes, and state unemployment taxes. Employees are also entitled to overtime pay if working overtime hours.
Employers aren’t expected to withhold the same taxes for a 1099 employee (and 1099 is also a tax form.) 1099 workers do their own taxes because they are technically self-employed.
It’s important to note that to the IRS, there are three specific rules that distinguish a 1099 vs. W-2 employee. They’ll look at these to determine if the latter is truly self-employed:
- Financial. Does your small business pay for work, along with tools and supplies and training?
- Behavioral. Does your small business have control over work assignments and when it must be completed?
- Relationship. Does your small business provide benefits that are written into the contract?
On their own, these might not signal a W-2 employee to the IRS. Put together, they may have questions in case you’ve filed the wrong form.
Real world examples of 1099 vs W-2 employees
It can get complicated referring to employees by their tax classifications. To help, we’ve compiled a list of 1099 vs W-2 examples you’ll find in the real world.
Common W-2 examples
- Retail | People who sell in-store
- Server | Workers at a restaurant, including bartenders but often excluding managers
- Barista | Coffee shop workers
- Administrative office worker | On-site worker like a receptionist
- Staff writers or editors | On-site full or part-time contributors, often on salary
- Project managers |Workers with ongoing projects and stakeholder meetings
Common 1099 examples
- Freelance writer or editor | Not hired on-staff but work by project—often remote
- Rideshare drivers |Think Uber or Lyft
- Photographer | Usually working at an event or for a specific project
- Consultant | Working on a project with a designated start and end date
- House cleaner | Often self-employed but works within designated cleaning spots at specific houses and times
- Graphic designer | On assignment from a number of small businesses—sometimes one-off or ongoing projects
Who should you hire? 1099 vs. W-2 employees for your small business?
Hiring takes a long time because you, as an employer, need to understand if you can carry the financial and employment responsibilities of having an added person to your team.
When it comes to hiring 1099 or W-2 workers, and which one you should choose, that decision comes down to a question: What does your business need?
If yours is a business with consistent customers, and you’re in need of coverage, like at a restaurant or coffee shop, it’s best to err on the side of a W-2 employee. They can still be part-time but you’re investing in more stability.
For work that isn’t consistent or needs a few months of support, it’s best to get a 1099 contractor. For example, if you’re redoing your website, you likely don’t need a full-time employee. That way you’re not required to provide anything beyond the contractually agreed upon pay.
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1099 vs W-2 employee FAQs
Is it better to hire 1099 or W-2 employees?
It depends on the work a small business requires. A 1099 employee is ideal for short-term, specific project work, while a W-2 employee is ideal for consistent, on-going work.
Do 1099 pay more taxes than a W-2 employee?
1099 contractors do end up paying more in taxes than a W-2 employee but there are ways to lower them through credits, business expenses, and putting money into retirement accounts.
What’s the difference between an employee and a contractor?
An employee is a worker hired for long-term, ongoing support. A contractor is a worker hired for casual or specific project work support.
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
