Before hiring workers, it’s important to understand two different hiring methods: W2 vs 1099. On the surface, both types of workers might look the same: they do a job, and you pay them for it. But they’re very different.
When you learn about W2 vs 1099 workers, you’ll see there’s much more to it, though. Knowing the difference can save you stress and money and make it easier to run your business.
This might sound confusing, but it’s simple when you get the details. Let’s look at W2 vs 1099 workers, including the pros and cons of both. Find out which you should use, or if you need to hire some of each.
W2 vs 1099: Similarities and Differences
W2 is for Employees
When you hire employees, they have to fill out a W-4. This contains their:
- Social security number
- Tax filing status
- Number of exemptions
You are then responsible for deducting employment taxes from their paychecks. These taxes include federal income tax, social security, and Medicare tax.
Your employees are protected under state and federal employment laws and also have access to benefits. Also, you are required to provide them with a W2 each year. The W-2 contains all of their tax information they need to file.
This probably sounds pretty familiar to you. After all, this usually comes to mind when thinking about employees.
Is this the right option for your business? Let’s find out.
Should You Hire W2 Employees?
You should consider hiring W2 employees if you:
- Need to supervise the work
- Want full control over the methods the employees use
- Want to set the hours and schedule
- Have a long-term need
- Require someone to perform an essential job function
If you don’t need to control the work or it isn’t an essential job function, a 1099 contractor might be the right choice.
Pros and Cons Hiring W2 Employees
When comparing W2 vs 1099 workers, it’s important to consider the pros and cons. Let’s look at the pros of hiring W2 employees.
- Let’s start with an important one – budgeting. When you hire an employee, you know how much you’ll pay that person. Sure, you’ll give raises from time to time, but you don’t pay by the job. In a tight economy, that’s a huge benefit.
- Also, you can get PPP loans to help you with the paychecks of W2 employees to keep them on the payroll. That’s another benefit in these difficult times.
- Loyalty is also a big one. When people work for you, they are more likely to be loyal. Loyalty and accountability go hand in hand so that you can expect better performance out of your W2 employees.
These benefits make it easier to plan for the future. You have loyal employees that will stick with you, and you know how much you’ll pay them.
Those are great reasons to hire W2 employees, but… as you probably guessed, there are some cons, as well.
- It can be complicated to fire W2 employees. You have to get everything in writing before you can make a move.
- And if someone thinks they shouldn’t have been fired, you could end up with a lawsuit.
- You also have to take on lots of responsibility with W2 employees. They are part of your payroll. You have to pay their taxes and provide benefits.
This can be pretty stressful, so you might want to consider going with 1099 contractors. Let’s take a look at that.
1099 is for Contractors
If you don’t want to hire W2 employees, you can go with 1099 contractors. These are independent contractors that work for themselves. You can hire them on a project-by-project basis or on a regular basis, but they aren’t your employees. Instead, they are contractors doing a job.
If you pay an independent contractor at least $600, you have to give them a 1099-MISC form. This form shows their earnings. You aren’t responsible for withholding taxes, though. Instead, they have to take care of that themselves.
When to Use 1099 Contractors
You might want to consider 1099 contractors if you:
- Want to have a trial period before offering a permanent job
- Need someone to work on a specific project with a start and end date
- Want to avoid paying benefits
- Experience high employee turnover
- Run a small business and want to avoid complex payroll taxes
Independent contractors pop up in all kinds of industries. They’re really popular in construction. Construction companies often have a crew on the payroll but use contractors for specific duties.
For example, a construction company might use independent contractors to handle electrical work. It’s expensive to keep electricians on the payroll, so this can help them stay on budget.
Pros and Cons of 1099 Employees
During your research of W2 vs 1099 workers, you look at the pros and cons of W2s. Now, let’s take a look at the pros of 1099 employees.
- The biggest pro is saving money. You don’t have to pay payroll taxes, benefits, and other costs. Most importantly, you do have to pay employees when you don’t have work for them to do. You have to pay a W2 for every hour on the clock, whether you need them or not. You only pay 1099 contractors when you need them. That equals cost savings.
- The freedom that comes with using 1099 contractors is also really nice. You don’t have to stick with an independent contractor. If you don’t like how someone works, you’ll never have to hire them for a job again.
But there are some cons to consider, as well.
- First, the best contractors are in high demand. They won’t just work for you. When you need them, they might not be available.
- You also don’t have a lot of say over what independent contractors do. They have their own way of doing things, and you can’t do much about it. You can avoid hiring them again, but you might have to get through a job first.
You might not be able to hire someone with a 1099: there may be laws in your locality that prohibit hiring 1099s if the job position should be filled with a W2. This is done to help workers get the benefits they are required to receive by law and to prevent certain companies from trying to avoid their legal obligations.
Now that you’ve examined W2 vs 1099 workers, it’s time to consider other options.
- Temp agencies are popular right now. You’ll pay the temp agency for the worker and have the option of hiring the person permanently if you want.
- You can also outsource job functions. This is different from using independent contractors. You will sign a contract to outsource a task on a long-term basis. This is often used for payroll and other financial duties.
W2 vs 1099: What Works Better for Your Business?
You’ve compared W2 vs 1099 workers and looked at the pros and cons of both. Both are great options for getting work done. It all comes down to what you need.
If you’re on a tight budget and run a small company, 1099 contractors are likely the right choice.
On the other hand, if you’re growing your business and need full-time people on staff, you’ll need W2 employees.
The great thing is that you don’t have to choose just one. You can have a mixture of W2 and 1099 workers in your small business.
Understanding the difference between W2 vs 1099 workers is just one part of running a business. There is so much to learn about business management, and knowledge is the key to success.
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