W2 Employees vs 1099 Contractors

Like most of running a business you are constantly making decisions where there is no right answer. Hiring is one of these instances. Depending on the business environment, there are different reasons why a company may or may not want to rely on full-time employees or independent contractors.

What’s the Difference?

Put simply, W-2 and 1099 employees are differentiated by the tax forms used to report their incomes. Full-time employees file income with IRS Form W-2, which details all wages and earnings for a year. Independent contractors receive IRS Form 1099, which accounts for wages, salary, and tips. From a business-operation perspective, 1099 workers aren’t direct employees of your company so they are governed under a different set of laws

Pros and Cons of W-2 Workers

Pros

• Your company is more likely to be their primary focus
• You can require training, meetings, and clauses like a non-compete agreement
• More cost effective per hour than a 1099
• You own anything produced during work hours

Cons

• You may have to pay for benefits
• These relationships are harder to terminate
• You are more obligated to pay them even if they aren’t working
• Hourly W2 employees may qualify for overtime pay

Pros and Cons of 1099 Workers

Pros

• They are easier to use as needed without all the paperwork
• You can hire niche skill sets without worrying about have 40 hours of work a week for them
• They are often more cost-effective annually if you don’t need a full-time person
• You don’t have to pay as much in taxes on this employee type
• These relationships are much easier to terminate
• No overtime rates

Cons

• You cannot require training
• They may have ownership rights to some created content
• You may not be their primary focus
• Some states frown on 1099 contracts (i.e. California)

In the end, whatever your reasons for choosing to go one route over the other, you should be fully aware of the logistical, legal, and operational consequences that come with your choice of employee.

Not sure what makes sense for you? Give CLS a call and we can walk through your needs and growth plans to help you design the right employee structure for your business.