The business world has various confusing matters, for instance, W2 and 1099 workers. These are two types of employees that fill out different forms. But what is the difference between them?
Most individuals probably know that salaried employees fill out W2 forms. These forms are needed to collect information for employers, so they know how much to withhold in taxes from their paychecks.
1099 forms are filled by independent contractors to the IRS to report their income. So, this is one difference. But what about other differences? Keep reading to learn more about 1099 and W2 workers.
Who is a W2 Employee?
Many consider W2 employees the default worker classification since it’s most common. W2 employees are typical salaried workers companies hire to do specific roles.
When compared to 1099 workers, W2 workers are hired for an indefinite period to perform specific tasks needed to be done consistently. Yes, these employees may resign upon completing specific jobs, or employer may fire them for poor work. But if they perform high-quality work, they stay in the company for a long period.
W2 employees don’t have as much freedom to decide how to perform their work as 1099 employees do. Companies typically have all control over methods and tools W2 employees have to use to do their jobs. They create work schedules and provide all these tools and training needed for employees to accomplish their tasks. Businesses also must provide reimbursement in case any business-related expenses occur.
Note: employers must provide their W2 workers with specific benefits. For example, overtime compensation, minimum wage, paid time off in case of illness, health insurance coverage, etc.
Some companies recognize huge competition and difficulties in hiring high-tire specialists. That’s why they offer even better benefits to win these talents. Often companies provide extra time off, retirement plan contributions, and services, such as meal plans, child care, and dry cleaning.
Tax-wise, companies withhold federal and state taxes according to the W2 form. The withholding includes social security and Medicare taxes. That’s why employees must be very careful when filling out W2 forms to avoid extra withholding.
Who is a 1099 Employee?
Typically, 1099 employees don’t have single employers. In reality, 1099 workers register and own their independent businesses. Overall, the 1099 workers category recognizes several types of self-employed workers. Each category specifies different types of work. Here are the most common categories:
- Freelancers. This category of employees includes self-employed taxpayers who choose which projects they want to work on and their pay rates. Typically, freelancers get paid by the hour or per project. Most freelancers prefer to work with several companies at a time.
- Consultants. This category of employees includes self-employed professionals with extensive skills and experience, training, and knowledge in specific work fields. As mentioned, they have extensive skills which guarantee high payment. Most companies working with consultants understand that their work is in high demand and must be compensated accordingly.
- Independent contractors. Similar to freelancers, independent contractors may choose their work, schedule, and pay rate. Typically, independent contractors prefer to choose longer-term work agreements, and they limit themselves to one or two clients at a time. Usually, independent contractors are paid by the hour. Some contractors prefer retainers.
- Gig workers. It’s a category of employees that perform temporary, flexible jobs. Typically, their services are available on online apps or platforms. Gig workers often get paid for completing each task — they don’t get paid by the hour.
Independent business owners (1099 workers) must understand all the business risk incurring in their field. They have to consider profit, losses and pay taxes since no one withholds from their paychecks. They must cover business expenses which include renting or buying equipment, repair, etc.
As for taxes, the IRS states that 1099 workers have to pay self-employed tax (unless exempt), calculate, and pay estimated taxes.
Companies should understand that hiring 1099 workers means they don’t have to pay payroll taxes on their behalf. They also shouldn’t offer typical employee benefits, like PTO and sick leave, or pay for their health insurance coverage retirement plan. Overtime isn’t an issue with 1099 employees as well.
Given this data, hiring independent contractors means companies pay about 30% less than when hiring W2 employees.
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What do Forms W2 and 1099 have to do with the Topic?
It’s clear that 1099s and W-2s are tax forms. The 1099-MISC is utilized to report payments made to the independent contractor a company worked with. These employees cover their own employment and other taxes.
A W2 form is a different form. It is used by employers, and they hand them to employees, so they fill out their tax data. It includes information about the status of the employee, potential credits they claim, and data that affects withholdings from the paycheck.
That’s why instead of “salaried employees” and “independent contractors,” people sometimes use W2 and 1099 employees.
How to Determine an Independent Contractor?
Owners of new businesses can have difficulties with determining whether they hire independent contractors or salaried employees. This section of the article is supposed to help differentiate between salaried employees and independent contractors.
The difference between employees and independent contractors is the degree of control a company has over the employee or the amount of independence they obtain when working.
The IRS offers three categories to figure out the degree of control or independence in a relationship between company and worker:
- Financial. Is the payer (company) controlling business aspects of the employee’s job? Business aspects include matters of how the employee is paid the reimbursement of business-related expenses, supplies, and resources provided.
- Behavioral. Does the business have control (or has the right to control) what the employee does and what tools they use to do their job?
- Kind of a relationship. Did the business and the employee sign the contract or agree upon employee-type benefits, such as vacation, insurance, etc.? Is this working relationship permanent? Is the work an employee performs is a key aspect of the company?
The IRS claims there is no one formula that makes a worker a salaried employee or a contractor. Instead, the agency offers to look at the working relationship and consider the degree to which a company controls the person in their work schedule, tools, and salary.
1099 and W2 Employees: The Difference
There is one major difference between a 1099 and a W2. A 1099 form is given to independent contractors. They must fill out the form and send it to the IRS to report the income. They also pay self-employment taxes.
A W2 is a form that an employer gives to employees. They must fill out the form and hand it to the employer. The form focuses on collecting information about employees’ income and payroll taxes withheld. That’s the main difference between these forms.
Given the information described in the previous sections of this article, you can say that there are many differences between independent contractors and salaried employees.
An employee is any worker performing services for a company if it can control what will be done and how it will be done. In simple words, employers control the way employees provide services, what tools they use, and how much salary they get.
Independent contractors are not controlled by companies. They have the freedom to manage their schedule, demand specific payment, and use the tools they require.
Another difference between these two types of workers is in taxation. Employers must withhold taxes from their salaried employees’ paychecks. But companies don’t have to do that when it comes to independent contractors — they pay taxes themselves.
And one more difference is in benefits. Companies must provide specific benefits to their salaried workers. But businesses don’t have to offer these benefits to independent contractors since they are self-employed.
1099 or W2 Employee: Benefits for Business
Both W2 and 1099 employees offer benefits to their employers. Keep reading to learn more.
Independent contractor or freelancer offers multiple advantages to companies, starting from great experience and specialized skills to fewer legal risks to the business.
Most contractors typically focus on one field, and they gain great experience and develop skills. When a company has a project that requires specific expertise, the business should be able to find a freelancer who has developed a business around this skill. So, 1099 employees offer to solve specific problems.
Companies often need to develop projects or solve temporary issues that don’t require hiring full-time job workers. If a company specializes in retail, why would they need an IT specialist in their staff merely to create a website? No, in this case, the company is better off hiring an independent web developer.
Fewer Legal Risks
Independent contractors don’t require workers’ compensation, and they don’t bring most types of wrongful termination claims. Most contractors even tend to have their own insurance. Naturally, these factors reduce the company’s legal exposure.
It may seem like hiring 1099 is the only way to enjoy benefits. But that’s not the case. W2 employees are valuable to businesses. Keep reading to learn why.
Note: in some specific cases, it’s best to hire an independent contractor, but in most cases, salaried employees are the ones companies hire. You can learn more in conclusion to the article.
When treated well, salaried employees are loyal and motivated, so they perform tasks better. It doesn’t mean 1099 workers aren’t good, but they have many clients and aren’t devoted to just one company.
Dedication and Collaboration
If a company has a project or a task that requires attention, most employees are OK to shift their focus since they are dedicated. Even if they don’t have the right skills, they are willing to learn. Contractors are often focused only on specific areas and simply can’t shift their focus.
Small business owners often feel overwhelmed when working alone, without permanent workers. Having staff allows them to take off some portion of the burden.
Participating in training is a must for most employees. The good news is that companies can invest just once into training and then finance periodic training. That way, their work will 100% meet the standards of the company.
Given everything mentioned in the article, should you hire a W2 or 1099 employee? It depends on your business needs, its strategy, priorities, and, most importantly, talent requirements.
Both types of mentioned workers are highly valuable to businesses. It’s possible to find great employees among full-time and part-time workers and self-employed workers.
Consider the following questions to figure out who to hire:
- Does my company need a specific skill full-time or only temporary?
- How easy it is to find the needed talent. Is it easier to find someone among freelancers or full-time workers?
- How fast should this employee start working? Do we have time to teach a new staff member, or is it better to find a professional among freelancers?
- What is the cost of the talent? What benefits should the company pay if hiring full-time? How much does it cost to pay wages to freelancers?
These questions help understand the difference between hiring freelancers or full-time workers due to the cost, timeframe, and other factors. Answer these questions to have a better understanding of whom to hire.
Author: Charles Lutwidge