1099 Independent Contractor vs. W2 Employee: Which Do You Need?
There are plenty of challenges and decisions that business owners face each day. Some of the most significant decisions center around their workers. Many creatives start small as solopreneurs, so they might not give much thought to the idea of human resources in their businesses.
What happens when you need to grow? Until they perfect human cloning, you only have one option. You will need to pay for help. In our labor system, you have two legal options when it’s time to hire someone to work for you. This is where you have to look at hiring a 1099 independent contractor vs. a W2 employee.
No matter how you choose to proceed, be sure to protect yourself with a legal contract. At Angie Avard Turner Law, LLC, I help creatives and other business owners protect themselves and their work. Through contracts, copyrights, trademarks, and more, I help keep you covered. Reserve a time to chat today.
What Is a 1099 Worker?
Many companies hire independent contractors to complete specific tasks. Everything from graphic design to business coaching can fall under this relationship. Independent contractors are often called 1099 workers due to the tax form used to account for this income.
But the tax form is not what dictates whether or not a worker can be a 1099 contractor. The law dictates that, and business owners need to be very careful when hiring independent contractors.
Flexibility, specialization, independence, and defined timelines all characterize typical 1099 worker situations. These attributes are not exclusive to independent contractors, of course. But they are measures that the IRS uses to gauge if you have classified your employees correctly.
Classification as a 1099 contractor comes down to who controls what. The IRS looks at which party decides the following:
Where the person does the work
What work schedule the person follows
Which tools or methods the person uses to complete the job
If the hiring business controls all of these factors, then the IRS does not classify this as a 1099 position. Instead, they should be a W2 employee. However, if the worker determines those aspects of the job, they can probably be an independent contractor.
A 1099 worker uses their resources to complete the contract, which may include hiring other independent contractors. They also are responsible for all of the tax burden from the income they report on a 1099. Independent contractors also are not eligible for worker’s compensation through the company.
Typically, if you pay a contractor $600 or more in a calendar year, you must provide them with a 1099 form.
What Is a W2 Employee?
The term “W2 employee” is another nod to tax forms. When a company hires an employee, not a 1099 contractor, they submit a W2 to the IRS at tax time.
When a business employs someone as a W2 worker, they determine where and when that person must do the job. They also provide the resources to do the work. Although an employee might start with a company in one role, the employer can change that role over time.
W2 employees receive a salary or hourly rate, and the employer pays a portion of the taxes on what they earn. There are also legal requirements regarding medical benefits and worker’s compensation insurance coverage for W2 employees.
1099 Independent Contractor vs. W2 Employee: Which Is Right?
Making hiring decisions can be very stressful for business owners. But the truth is that to grow and scale your company, you will need help. Even micro-businesses frequently hire contractors or employees.
It’s critical that you classify your workers correctly because the IRS can and will penalize companies that do it wrong. Often, businesses try to use independent contractors to avoid paying as much in taxes, salaries, and benefits as they would for W2 employees. However, if they don’t fit the criteria, you could be in trouble for breaking the 1099 rules.
Penalties for intentionally misclassifying a worker as a 1099 contractor when they should be a W2 employee can be steep. You could face fines up to $1000 and a year in prison for each instance. And there are other financial and legal repercussions, too.
So, just don’t do this. No financial saving is worth the risk.
How do you know if you should hire an employee or a contractor? You probably need a 1099 worker if the following things apply:
You need specialized expertise for a specific project, such as a graphic designer to redesign your logo.
You need someone for a short-term project, such as an IT contractor to upgrade your computer system.
You will not have any say in when, where, or how they meet your specifications for the job.
On the other hand, you must make the role a W2 position if these situations apply:
The company will dictate the worker’s schedule and where they must work.
You need someone to fill multiple, flexible roles within the business.
Again, look at how much control you will have over the position as you decide how to hire.
What Roles Are Usually a 1099 Position?
There is nothing wrong with hiring independent contractors for many roles in your business. Some micro-businesses exclusively use 1099 workers. You just have to ensure that you’re doing it legally.
Here are some services that companies commonly choose to contract out to other businesses:
Social Media Marketing
Virtual Administrative Assistance
Still Unsure How To Proceed?
Being an entrepreneur is rarely simple. But when you have the right support and advice, you can make your life a little easier.
Whether you’re unclear how to classify a worker or need to draft contracts for your employees and contractors, I can help. I work with businesses throughout Georgia for their labor contract needs and throughout the country for other intellectual property situations.
Schedule your time to talk so that you can have the peace of mind that comes with having appropriate legal protection.