With positions and scopes of work growing increasingly complex, more and more companies opt to hire different types of workers. Deciding whether to hire full-time employees or independent contractors depends on several factors, including taxes, compensation, and benefits. This article will outline all of the relevant factors so you can understand them better and make an informed hiring decision.
A summary: 1099 contractors vs. W2 employees
We deal with two types of workers in this article: the independent contractor (1099 worker) and the employee (W2 worker).
Simply put, the W2 worker is your standard employee - you pay them a salary or wage, withhold their income tax, pay their payroll taxes, insurance, and provide benefits. On the other hand, you have an independent contractor who works for your company on a per-project basis for a set fee. They are not entitled to any taxes and benefits - being self-employed, they cover all of those expenses for themselves.
There are benefits and challenges for each of the two worker types, and different legal obligations and tax forms. Continue reading for a more detailed breakdown.
What is a 1099 worker?
A 1099 worker is often known as an independent contractor or a freelancer. These are essentially self-employed workers, and you are their client. The name 1099 worker is derived from the 1099 tax forms used for reporting their income. In most industries, independent contractors are usually hired for specific projects and limited, short time. However, in the modern (and global) work environments, contractors are often hired for more extended periods for all those services that are not the core of your business.
The most important aspect of hiring independent contractors is taxes - contractors pay their own taxes, as well as other benefits. You are essentially paying them a lump sum for their services, while the business expenses such as equipment and licenses fall under their responsibility.
Contractors are basically small business owners who work for multiple clients and don't enjoy employee-type benefits.
Pros of hiring 1099 workers
Many companies can benefit significantly from hiring 1099 workers, especially in addition to their existing base of full-time workers. We've written extensively about the benefits of hiring independent contractors, but here are the most important ones:
Supplementing your business needs
If your company needs certain services (such as design projects, programming, or machine maintenance), 1099 workers can provide you with great quality of work without the need to hire a dedicated full-time position
Managing a fluctuating workload
Since contractors are usually hired per project, there is no need to worry about them not having anything to do once their tasks are over. 1099 workers are ideal for companies whose work has seasonal upticks or any other fluctuations during the year.
Gaining access to a broader talent pool
When you hire independent contractors, you can choose from a global talent pool. Maybe the specialist you are looking for is located halfway across the world and offers incredible quality for a lower price. Unlike with employees, you can hire contractors anywhere in the world without any legal barriers.
Full-time employees sign employment contracts that protect their rights and put specific responsibilities on their employers. On the other hand, contractors are not employees, and they bear the risks and benefits of their businesses themselves, which leaves their clients with a significant portion of savings on taxes and benefits.
Cons of hiring 1099 workers
Now that we laid out the pros let's see what the cons of hiring independent contractors are:
The lack of control
One of the defining aspects of contractors is their independence while performing work. As their client, you can not control when or how long they work, their workspace and location, and their methods. The degree of control you have when working with 1099 workers is the end result of their work, and whether it satisfies the criteria you agreed on. The bottom line is that 1099 workers are not an excellent choice for those with trust issues or micromanaging needs.
A significant factor to pay attention to when forming contractor relationships is the ownership of the work and its final products. In some cases, if you haven't explicitly stated otherwise, the work results could belong to the contractor and not the hiring company. Make sure to include an ownership clause or copyright transfer clause into the contract you make with the 1099 worker.
By far, the biggest issue with hiring contractors is the misclassification risks that come along with this form of a working relationship. In the US, the IRS pays close attention to employee misclassification and treats it as a severe offense. Read more about what misclassification is and how to prevent it.
What is a W2 employee?
A W2 employee, usually known as a full-time employee, is a person hired by your company under a standard employment contract. This contract usually offers a salary, paid benefits, tax withholding, and other perks and benefits. The name W2 worker also comes from a tax form, the Form W-2, used to report employees' income.
Unlike contractors, employees need to abide by company rules (such as code of conduct) and follow work hours, holiday schedules, tasks, and requirements for their respective positions.
Pros of hiring W2 employees
Even though most companies and recruiters are familiar with employment contracts and procedures, here are some benefits of hiring W2 employees:
Control and oversight
W2 employees work under the guidance and oversight of their employers, which means they work at the employer's premises, follow procedures and protocols, and adhere to the company's work hours. In other words, the hiring company can control every aspect of how employees do their job, including methods and outcomes.
All the work employees do for a company automatically belongs to the company, and there are no uncertainties, unlike when it comes to 1099 workers.
Employees, especially those who have full-time contracts, usually work exclusively for their employers. This exclusivity means they don't take other jobs and clients, focusing entirely on their full-time job.
Cons of hiring W2 employees
Similarly to 1099 workers, W2 employees come with their own set of challenges during hiring and employment:
Costs for the employer
If you are an employer, your W2 workers are entitled to tax withholding, health insurance, and other employment benefits. Depending on your location, these expenses can quickly add up and increase your business expenses. Don't forget the legal and bureaucratic aspects of these contracts, and they can add up quickly too!
Predicting the workload
Once you hire an employee, you can't simply fire them because their workload has gotten smaller. Hiring employees means predicting their positions, roles, and workloads well and making sure they always have tasks to complete, which isn't always easy.
Training and equipment
W2 employees work for your company exclusively, which means they use your equipment, as well as your work methods and strategies. Once you hire a new employee, you need to onboard them and provide training and equipment to get them started. Both of these require time and money, once again increasing the cost for the employer.