Small and large business owners often find it necessary to hire employees for some roles and independent contractors for others. It helps to understand the difference between the two as a business owner, which includes knowing when to use W-2s and 1099s.

Why You Should Understand the Difference Between W2 Employees and 1099 Contractors

It’s crucial to know the difference between employees and independent contractors during recruitment. Otherwise, you will find it difficult to choose between the two types of workers. You will not understand why one might be better for a specific role or your organization than the other.

What Are Independent Contractors?

Independent contractors are self-employed. You sign a contract with independent contractors to complete a specific task or play a particular role. Thus, contractors use their resources and set their hours. They also have the freedom to work for several businesses. Since they are independent, they pay their taxes. So, you will not withhold taxes from their paychecks.

What Are Employees?

Employees are workers hired by your business under an employment contract. As a business owner, you must withhold employment taxes from their wages and submit them to the IRS. You may also train your employees and provide benefits. You have more control over them and can dictate when and how they work.

1099 Vs. W-2

W-2s and 1099 are tax forms. Business owners use the W-2 for employees and 1099 to report payments made to contractors.

1099 Contractors

Independent contractors receive a 1099 form to report their income when filing their tax returns. Independent 1099 workers may also be gig workers or freelancers. Usually, businesses hire independent workers to work on a specific project or complete a particular task as defined in a contract. They can choose to employ workers to help them.

Pros and Cons

Hiring an independent contractor will depend on your business goals and objectives. An independent contractor may be the way to go if you need a specialist to complete just one or two tasks or projects. However, a W-2 employee may be a better fit if you have ongoing specialized projects. Some of the pros and cons of hiring 1099 workers include:

Pros

• They provide specialized expertise and skills beyond the capabilities of your team.

• Their contracts are usually short-term, which is suitable for your operational budget.

• You do not have to provide employment benefits, making them more affordable.

Cons

• You have less control over when and how they work.

• There are some additional legal considerations. For example, you may find it difficult to dismiss an independent contractor.

• You lack the protection of worker’s compensation.

W-2 Employees

Business owners use the W-2 form to report taxes withheld and annual compensation for employees who receive regular pay and benefits. W-2 employees can work full-time or part-time according to business policies and a schedule. Also, they participate in employee benefits programs and get at least the minimum wage.

Pros

• Business owners have more control over their work and benefit from employee longevity.

• Employees tend to be more committed to their employers.

Cons

• W-2 employees require more effort and time.

• Business owners must provide the resources their employees need to work.

• They cost more than just their hourly wages or salaries.

Essentially, you should understand how to classify your workers. Whether you have an accountant or payroll service to handle payroll, you should understand how taxation applies to both you and your workers.

For more information on W-2 employees vs. 1099 contactors, contact Big Picture Results at ops@bigpicresults.com