Whether you’re looking for employment abroad or you’re browsing the global talent pool in search of new team members, you’ll inevitably have to face specific tax forms you need to fill in. Depending on the employment status the employer and an individual agree upon, you typically choose between the W-2 form (for employees) and the 1099 form (for independent contractors).
If you’re a business owner, you may not be sure what type of contract you should offer your employees and whether you need full-time workers or contractors (or freelancers). If you’re the one looking for work, you may be wondering if being on a company’s payroll or working as an independent contractor will work better for you.
Both forms have their perks and downsides. Read on to find out what they are.
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A W-2 employee, named after the IRS W-2 form (Wage and Tax Statement), is hired as a full-time employee directly and is paid through company payroll. A W-2 employee receives worker's compensation (salary) and employee benefits from the employer and usually has a standard employee contract.
W-2 workers have to follow the company’s guidelines when it comes to code of conduct, task completion, and similar rules, but also get to enjoy the benefits of being employed full time: Medicare, Social Security, overtime pay, paid holiday, etc. The employer is responsible for paying FICA taxes, which include medicare taxes, for example.
The employer has an obligation to report the employee’s annual income and do their tax payments. The employer uses the W-2 form to report any tax withholdings, as well, and they need to send it over to their employees by January 31st each year.
Pros and cons of hiring W-2 employees
A company typically has a higher degree of control over a W-2 employee. Their employees work for them only, without being distraught by other projects. Also, the employer is usually the one who decides what the schedule will look like and what roles an employee can assume.
The work products of W-2 employees belong to the employer without them having to draft a new contract for each specific case, like with independent contractors.
On the other hand, a full-time employee is a higher expense for a company due to the payroll taxes, unemployment insurance, etc.
1099 independent contractors
If a company isn’t hiring full-time employees, they may work with independent contractors. This type of relationship in business means that an independent contractor may be hired short-term or part-time. They’ll work for a company until they complete a specific project over a specific period of time. Hiring this way of often done by small business owners.
The law sees these workers as self-employed. They aren’t on the company’s payroll, nor is the company obliged to withhold any taxes from the independent contractor’s payment. Although an independent contractor isn’t a traditional employee, they need to pay for their own health insurance and take care of their income tax and possible tax deductions.
For example, if an independent worker earns more than $600 per one calendar year from a single employer, they will receive the form 1099-NEC from (previously Form 1099-MISC) the business or individual who hired them. The business owner also needs to fill in a copy of this form.
Pros and cons of hiring an independent contractor
An employer can benefit from working with independent contractors because it’s an excellent way to outsource specific services when there’s no need to hire a full-time employee. Therefore, your business expenses are smaller. Moreover, a company has access to workers from different countries who may not be willing to relocate for work but can work remotely as freelancers.
However, what an employer may lack is control over the contractor. That’s why it’s critical to define all the aspects of the collaboration in the contract, especially if the independent worker needs to give up on their ownership rights (for instance, freelance designers or writers).
Also, there’s a misclassification risk that may lead to financial penalties. An employer may try to avoid paying for medicare and social security taxes, and unemployment taxes for their workers, so they classify them as independent contractors when they’re really employees.
Employees who work as independent contractors have more freedom to organize their own working hours, and they can work for any company in the world without having to move. They may also experience a larger diversity of projects and gain more professional experience as they’re hired by the project.
On the other hand, they have quite a lot to think about during tax season. Independent workers have to do their own taxes and have healthcare and a retirement plan in place. Independent contractors pay self-employment taxes - they’re in charge of reporting their taxable income.
The Bottom Line
Finding and hiring people can be challenging whether you have a small business or a large enterprise. It’s just as time-consuming to find the right employer and commit yourself to doing great work. What kind of professional relationship are you going to choose? It all depends on your current needs and plans for the future. Both of the mentioned types have its pros and cons, so take them all into account when making the final decision.