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1099 Contractor vs Employee: What’s the Difference?

The primary difference between a 1099 contractor and a W2 employee is employment status: 1099 contractors typically work for set periods defined by their contracts, whereas W2 employees are typically more permanent.

Understanding why companies choose one over the other is a bit more complicated. Let’s break down the pros and cons of hiring 1099 contractors versus W2 employees.

Pros of Hiring a 1099 Contractor

You Save on Wages

U.S. Contractors based in countries with lower wages are an attractive prospect, which is why so many companies choose to outsource specific tasks versus keeping them in-house.

By going this route, companies can save a tremendous amount on wages. This raises some important caveats though, such as ethical standards surrounding paying people less than the work is worth and decreased quality of work due to 1099 contractors not understanding how your business functions.

You Save on Taxes

With 1099 contractors, your company is not responsible for withholding taxes or for paying items such as Social Security, Medicare, and unemployment taxes.

Independent contractors pay all their own taxes, which significantly decreases the burden on the company.

You Save on Benefits

In nearly all agreements with independent contractors, company does not provide benefits such as healthcare, vacation, sick time and retirement plans. This adds to the overall cost savings of choosing a 1099 contractor over a W2 employee.

More Qualified Hires

When the conversation of independent contractor vs employee comes up, many companies decide that working with a contractor is the best solution because they are often more qualified than other kinds of candidates.

Why is this the case?

Many contractors have the ability to work for multiple companies at once. This means that it is much easier to learn both hard and soft skills than if you were only working at one job.

This makes a contractor a swiss army knife, and when coupled with the fact that many contractors are extremely self-motivated individuals, companies often find that their 1099 contractor can hit the ground running with only a briefing.  

Hiring Flexibility

For companies that need to quickly build a workforce to take on a new project, 1099 contractors are often the way to go.

If your company regularly deals with clients that come and go, hiring a team of contractors that will only work for the length of the project makes a lot of sense. This will ultimately help the company cut down on costs associated with completing work.

Cons of Hiring a 1099 Contractor

Higher Hourly Rate

While companies can shop around to get a deal on a contractor, especially those located in other countries, it’s important to remember that contractors based in the U.S will almost always charge more by the hour than a salaried employee.

This is because contractors must ensure that they have enough revenue to cover their taxes and other items such as healthcare.

Workplace Communication Suffers

Miscommunication and confusion are two elements that all companies deal with in one form or another.

In these situations , communication that starts on email or over the phone progresses into an in-person, face-to-face conversation where the parties involved hash it out to get to clarity.

However, when one or more parties are working remotely, it can become exponentially harder to work through these sorts of problems, as there’s really no substitute for a face-to-face conversation.

Sure, technologies like screen sharing and remote computing ease some of the burdens; however, these systems can be prone to sudden failure. In this case, your company runs the risk of losing out on precious productivity until the technical problems are solved.

What does this have to do with 1099 contractors? Well, as it turns out, many people become contractors for the benefit of working from home, so companies need to be aware that if they’re considering going the 1099 route, it’s a good chance that they will have to work with a permanently remote professional. It can be a bad thing to have a 1099 contractor come into the office as this can muddy the waters when it comes to what their classification is in regards to your company.

Unreliable

Many companies feel uneasy about working with a fully remote employee because it’s difficult to ensure that the employee is utilizing their time appropriately.

With a remote employee, you must trust that they are completing their work, which unfortunately is not always the case. This puts the company in an awkward situation where they must break the employee’s contract and then either find a new contractor or a traditional W2 employee.

Another dynamic that companies need to be concerned about when discussing 1099 vs employee pros and cons is that contractors are usually hired for a set number of hours. If unexpected changes come up and need to be implemented immediately, your contractor may or may not be available depending on how their agreement was structured.

Pros of Hiring W2 Employees

Accountability

While it’s true that a 1099 contractor must fulfill their agreement with the company, they are not obligated to do anything else. This isn’t to say that 1099 contractors will deliver poor quality work, but it does mean that a contractor will only provide you with what is on the contract. Depending on the wording of the contract, their quality of work may not be as crucial to them as it would be with a W2 employee because they’re going to get paid for the job regardless.

This doesn’t mean that some W2 employees don’t try to take advantage of their company; just that it is easier to ensure a W2 is doing their work because you are usually their sole source of income.

Recruiting

When a company decides to go the traditional route and hire a W2 employee, they will have access to a larger talent pool than if they were to hire a 1099.

This also means that the company will have to spend more resources sifting through resumes and screening candidates; however, with the help of an applicant tracking system this process can be cut down drastically, making it that much easier to find that perfect candidate.

Succession Planning

Developing a succession plan for high-ranking members of your workforce is something that many companies don’t spend enough time doing.

You can probably think of a current contributor who would leave a giant hole in the company if they were to suddenly get up and leave for other employment opportunities.

In these cases, W2 employees hold a distinct advantage over 1099 contractors in that they are better suited to be part of a succession plan, as they are more likely to still be affiliated with the company in some manner for a longer period of time.

Cons of Hiring W2 Employees

Taxes

Regular W2 employees require that companies pay payroll taxes, unemployment, and workers compensation (i.e., medical care, temporary disability benefits, permanent disability benefits, supplemental job displacement benefits, and death benefits). This adds up as more employees are added to the workforce.

Harder to Fire

Even though most states allow employers to fire employees at will, many companies will have their own in-house process for firing employees that still need to be followed. This process includes items like performance reviews and progressive discipline steps that need to be kept up-to-date. For situations where there is a union involved, it becomes even trickier.

Requires More Time for Training and Managing

Finally, W2 employees typically require more training and managing than 1099 contractors, simply because they will need to become acquainted with internal systems and processes to complete their day-to-day tasks.

Additionally, because W2 employees typically work onsite, supervisors and managers will have to dedicate a portion of their time to ensuring that the employee is arriving on time, completing their work, and staying busy when things are slow.

Which Should You Hire?

Knowing whether to hire a W2 or 1099 comes down to how your company does business and what its labor needs.

For more help, please take a look at these other great articles from Newton Software:

Understanding the Cost Per Hire

The Cost of a Bad Hire

Workplace Compliance Checklist for Small and Medium-Size Employers

How to Find and Attract More Qualified Candidates

Internal Recruitment: What, Why, How and When

 

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