1099 vs W2

Making hiring decisions is one of the most important yet challenging aspects of running a business. If you don’t have a dedicated HR specialist, the complexities of worker benefits, classifications, and tax requirements can leave you frustrated.

In particular, it can be challenging to balance your staffing needs with the cost of hiring; fortunately, 1099 Independent contractors can help you do just that.

Independent contractors come with several benefits, from reduced tax expenses to seasonal flexibility, that can drastically reduce your hiring costs and fill any gaps in employment.

In this article, you’ll find everything you need to know about the benefits of 1099 contractors and when to hire them so you can save time and money on the hiring process and get back to what matters most—your business.

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1099 vs w2 employees

1099 vs. W2

Labor costs continue to be the largest expense many employers have, representing as much as 70% of a business’s expenses according to data from Paycor. No matter how strong the economy, employers are always looking to save money on labor.

One of the best ways to do that without hurting business results is with 1099 independent contractors. There’s a reason the number of independent contractors, often called gig workers, in the U.S. grew by 15% over the past decade alone—they’re great for the bottom line.

W2 Employees

It’s not that W2 employees don’t have their advantages, they certainly do. When you hire a W2 employee, you are locking a person into a contract that improves their commitment to your organization, offers more continuity in employment, and allows for greater control over working hours and conditions. 

Of course, all that comes at a price, W2 employees get their name because of the W-2 form employers file with the IRS to employ them. This means they are full-time employees paid, not for contract work, but consistent employment. And that leads to more expenses for employers, including payroll taxes, insurance, and more. 

1099 Independent Contractors

1099 independent contractors get their name from a tax form; in this case, the form is called 1099-MISC. It’s an independent filer form that requires employees to pay their payroll, social security, state, and local taxes without an employer’s assistance.  

1099 contractors have a lot more freedom than their W2 peers, and thanks to a 2017 corporate tax bill, they are allowed significant additional tax deductions from what is called a 20% pass-through deduction. However, they often receive fewer benefits and have far more tenuous employment status with their organization.

If you’re an employer, it’s a good idea to remember 1099 independent contractors still require W-9 forms and valid taxpayer IDs (EIN or Social Security Number). And it can pay to make sure your 1099 contractor isn’t subject to backup withholding

It’s the responsibility of independent contractors to pay their taxes on their own at the end of each year, and if they don’t, they may be subject to backup withholding. If they are subject, an employer must send their paychecks directly to the federal or state government to which the money is owed. That can mean some additional work on the employer’s end you may not be looking for.

The IRS Test to Determine Independent Contractor Status

The IRS has developed a short test to determine independent contractor status. The test includes three elements:

  1. Behavioral: W2 employees are generally given more instruction, when to work, where to work, what tools to use, etc.
  2. Financial: Independent contractors often have a significant investment in their work (i.e., an Uber driver’s car). Everything from the type of payment to payment frequency can also be used to determine status here.
  3. Type of Relationship: Is there a written contract with lengths of employment or in perpetuity? Just because the contract says an employee is an independent contractor does not mean the IRS will agree.

Unfortunately, determining whether an employee can be an independent contractor is, at times, more of an art than a science given the IRS’ limited test.

If you’re still having trouble determining which type of IRS classification your workers fall under, it’s better to be safe than sorry. Fill out Form SS-8 and send it to the IRS to determine the status of your workers to avoid the costly mistake of misclassifying employees. The last thing you need is a hefty fine from the Department of Labor for employee misclassification.

1099 vs w2 employees

The Many Benefits of 1099 Independent Contractors

There are many benefits to hiring 1099 independent contractors. Below, we’ll explain how employers and employees benefit from this work status, and why independent contract work has become the new normal.

Reduced Business Costs

Reduced business costs are one of the main reasons many employers are switching to 1099 contractors.

Employers don’t typically provide health insurance or benefits for independent contractors, which creates significant savings. Employers also don’t have to pay contractors overtime, and contractors have no minimum wage requirements. Additionally, employers can save time by avoiding all the paperwork involved with W2 employees’ tax withholdings.

Needless to say, once you see the cost savings of 1099 vs. W2 employees, it’s hard to go back. 

Flexibility

It’s not just employers that benefit from 1099 status. Having the flexibility to decide when you want to work and for how long is a luxury for employees. Many gig workers also love the flexibility independent contractor work brings to their lives. 

Whether it’s a single mom looking to take short shifts during the days so she can take her children to school and pick them up, or just a night owl who prefers working nights, 1099 employment provides a lot of opportunity regular jobs just can’t.

Only Pay for the Staff you Need

Another amazing benefit of 1099 contractors is the seasonal and event flexibility it provides employers. Ramping up and down in staff can hurt a business’ bottom line, but with 1099 contractors, you only pay for the staff you need, and the onboarding process is quick and inexpensive.

Less Legal Risk

Employers aren’t responsible for worker’s compensation premiums for independent contractors. That’s a huge benefit for many businesses that can be bankrupted by a single claim. 

On top of that, contractors usually have their own insurance and many times can’t file wrongful termination claims as readily, reducing legal risks for employers.

Specialized Workers

1099 independent contractors usually have specialized skills for the job. That means less money and time needs to be spent on training. Contractors’ quick time to start is an invaluable tool for businesses that operate on deadlines and need extra help. 

Tax Relief

As an employer, there are two main differences between W2 employees and independent contractors when it comes to taxes:

  1. Businesses are required to withhold taxes on W2 employee paychecks.
  2. Employers are responsible for some payroll taxes for W2 employees. 

Current payroll taxes include the social security tax of 12.4% and the Medicare tax of 2.9%, both of which are split 50-50 between W2 employers and employees. In contrast, independent contractors are responsible for 100% of their payroll taxes.

With the burden of payroll taxes crippling so many businesses across the country, some independent contractor tax relief can be a real blessing for businesses.

Your Independent Contractor Hiring Options

If you’ve decided the many benefits of independent contractors outweigh the negatives, and you’re looking to hire, you have a couple of options. 

You could try job boards, traditional temporary staffing agencies, social media campaigns, or referrals. However, the best way to hire 1099 independent contractors is with Qwick.

Qwick is a revolutionary restaurant staffing agency that connects employers with contract Professionals. 

At the click of a button, employers can access industry Professionals who are audited by Qwick, which has yielded an impressive 98% shift fill rate.

You don’t need to worry about a ‘bad’ hire, Qwick offers a no-risk ‘try before you buy’ program that allows employers to work with 1099 contractors before hiring them full-time if they are a good fit.

Even more, Qwick manages the taxes of 1099 independent contractors.

Qwick is the cost-effective, win-win solution to job boards and staffing agencies that savvy employers use to accomplish their short-term and long-term hiring goals.

So, if you’re looking to hire an independent contractor and want the best—think Qwick.

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