It has frequently been said that employees are an organization’s greatest asset. Anne M. Mulcahy, former CEO of Xerox Corporation has added to that expression, “You want to attract and retain the best; provide them with encouragement, stimulus, and make them feel that they are an integral part of the company’s mission.” But, the workforce is not only full-time employees. Learn about W-2 employees vs. 1099 contractors and how both types can contribute to the success of an enterprise.
How to Determine W-2 Employees vs. 1099 Contractors
- Does the business control the worker’s behavior? If so, the individual is a W-2 employee.
- Does the business have financial control over the employee? If so, the individual is a W-2 employee.
- Does the employee have a permanent relationship with the company and work the schedule their employer requires? Does the individual receive benefits such as insurance and vacation pay? If so, the individual is a W-2 employee.
What Are W-2 Employees
W-2 employees are individuals who are hired under an employment agreement. A company trains them, pays their wages, withholds taxes, pays employment taxes on their behalf, and provides benefits. The pros of hiring W-2 employees are that the business has exclusive rights to their work products, employees often identify strongly with their employer, have loyalty to the organization, and value their financial security. They can generally be relied on for ongoing support. For example, working late when necessary, pitching in when times are tough, and helping where they are needed. A business has stronger control of employees’ schedules and work processes.
What Are 1099 Contractors
1099 contractors are individuals who are self-employed. A company has a contractual relationship with an individual to perform a specific role or to complete a specified task. A contractor will set his/her own hours and use their own working tools. The business does not withhold taxes nor provide benefits.
When To Use W-2 Employees vs. 1099 Contractors
A company might use W-2 employees when:
- There is continuing work for the role/individual.
- It is important to have the individual use company tools and follow specific protocols.
- The work requires regularly scheduled hours and/or a specific work location.
- The work requires employee oversight and management by the company.
A company might use 1099 employees when:
- There is a specific task or project to be done.
- There is no guaranteed need for ongoing work.
- The work doesn’t require a set schedule or a specific location.
- The work can be done satisfactorily without active company supervision.
It should be noted that there are different pay processes and tax forms for W-2 employees vs. 1099 contractors, so it is wise to get expert payroll assistance to avoid IRS penalties.
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