As you staff your business, you have many ways of bringing in talent. Two of the most common work arrangements to consider are the W-2 employee and the 1099 contractor. There are some similarities between them, but there are some important differences that can affect your business. So, you need to know what will work best for your organization’s hiring needs. To file informative returns, your company must tell the Internal Revenue Service (IRS) about any payments it made for work being performed. The type of information you use for this purpose will depend on the nature of the service provider.
The Main Difference Between Form 1099 and Form W-2
The main difference between these two forms has to do with what needs to be entered into them. Form 1099-NEC reports payments for independent contractors, so no tax payments are reported on this form. Form W-2 is a more comprehensive information return. Not only does it list taxable compensation to employees, but it also lists income tax and Federal Insurance Contributions Act (FICA) withholding. Any salary reduction amounts for contributions to 401(k) plans and other employer-specific benefit plans will also be reported on a W-2.
For an employer, using independent contractors won’t cost as much as employees. Most of it comes from not having to pay employment taxes for independent contractors. You don’t have to offer benefits to 1099 contractors, and there are fewer administrative costs. Independent contractors are workers who are in business for themselves. They have control over when and how their work is accomplished, and they use their own tools and equipment. They also risk profit or loss on each assignment.
What to Consider When Classifying a Worker
Whether you hire people as employees or use them as independent contractors, there’s a lot you need to think about. Both of them can contribute to your organization and help you meet your goals. A W-2 employee is a good fit if the following apply:
- You want committed workers who will be loyal and productive over the long term.
- You prefer to keep worker knowledge and skills in-house.
- You have a distant corporate culture that you want to foster and maintain.
A 1099 worker could be right for your company in the following circumstances:
- You don’t want to pay payroll taxes or benefits to keep your costs low.
- You would rather not invest the time or resources in training and prefer to bring in specialized expertise.
- You want the flexibility of terminating the relationship when a project is done or as your budget allows.
If bringing on a contractor makes the most sense to you, you need to know who a 1099 worker is. But if you believe that a W-2 employee is a better fit for company’s needs, you also need to understand the different types of employees you can hire so you can staff your business appropriately.
How Each Classification Can Affect Company Culture
Hiring W-2 workers will allow you to bring in people who are a good fit for your organization. They can become a part of your team and workplace environment, which can be helpful in creating a better company culture. It can also be an advantage in terms of employee retention and recruitment. Your employees may feel more secure in their roles within the company, which can help them to focus because they won’t always be looking for another job.
1099 contractors usually aren’t as invested in the company’s culture. They’re more concerned about completing the job or assignment and moving on to the next one. They can also be disruptive to employees and even the company’s culture. Yet the transient nature of a 1099 worker can be advantageous, because you don’t have to keep working with that person after the assigned job has been completed.
What Can Happen if You Misclassify a Worker
It can be hard to determine if a new hire should be classified as a W-2 employee or a 1099 contractor. Not only do you have to classify this person correctly in the beginning but you must also reevaluate his or her role in case the nature of your relationship changes. You need to use the proper classification, or your business may face severe legal and financial consequences.
If you’re looking for an employment law attorney in Corpus Christi that can help you navigate the legalities of hiring people for your business, be sure to reach out to Gale Law Group.