As a small coworking space business owner or an entrepreneur preparing to hire your first employees, you might be wondering whether it pays to include them into your payroll or to instead contract freelancers. Let us compare the main forms of employment so that you can decide which one works better for you. In a nutshell, there are two forms of worker classification and, consequently, two ways of hiring employees: 1099 and W2.
The former stands for an independent contractor, while the latter refers to a traditional salaried employee. What’s the distinction between a contractor and an employee?
You can exert control over your employees’ work. They normally come to work and leave the office at a particular time and complete their tasks by a deadline set by you. Typically, a full-time employee works only for you. A front desk manager or a community manager are examples of W2 staff members.
An independent contractor, on the other hand, exercises greater freedom. They can set their own schedules. They are also more flexible with the tasks they choose to accept and usually work for a few clients. Cleaning personnel or tech support are typically independent contractors.
Hiring employees on a W2 means including them in your payroll, paying all taxes, health insurance and contributing to unemployment insurance on their behalf. All in all, the regular costs associated with hiring a salaried employee are quite high.
Another thing you should remember is that terminating a contract with a W2 worker is more difficult than that of an independent contractor. That’s why it’s crucial to document any behavioral issues of salaried employees and to conduct annual performance reviews.
At the same time, a pro of W2 salaried employees is that they feel more secure. They tend to show more loyalty and accountability for their work and its quality. As an employer, you can attract a wider pool of talented people if you hire them as salaried employees, because highly skilled professionals usually cherish social stability, paid vacations, corporate perks and incentives that an employer provides.
Hiring independent contractors means saving on costs. Not only do you save on taxes, health insurance, retirement plans, and social contribution, but also you can pay them on an ad-hoc basis for the projects that they have completed. Another 1099 pro is that you can find someone who can solve your particular problem; independent contractors tend to be someone with a very specific expertise.
Another advantage of 1099 contractors is freedom for both parties. Freelances can work for higher rates and might have a better work-life balance. Many independent contractors will even work online, and will only be in contact with a few members of the team via email, with perhaps the occasional Skype or phone call. For employers, the advantage of 1099 work contracts is that they are are not entitled to overtime pay, workers compensation, or vacation. Of course this freedom implies a disadvantage to 1099 workers, because without the incentive of certain work benefits, there is no guarantee that the worker will perform the quality of work you may be looking for.
However, a 1099 partner might not be bound by a service agreement solely with you. They can be working for a few clients at the same time and may not be available to work when you require their urgent assistance. Independent contractors might never become part of your close-knit team because they are usually outsiders who come if and when needed.
Hiring an independent contractor comes out cheaper; however, you should be proactive and consider how things will look longterm. For example, you might be better off hiring a salaried community manager whose personality and approach to work will help you build a flourishing community. At the same time, thanks to visitor management systems, you might need a receptionist on rare occasions for certain events and thus, can hire them as a contractor. The same holds true about technical support and cleaning personnel.
To help you decide whether you should hire a salaried employee or an independent contractor, ask yourself these questions:
If the answer is 30 hours or more, you need to hire an employee.
If the answer is yes, we are also talking about a W2 worker.
Usually, independent contractors charge more per hour but cost you less in the long run, because you pay for them as they complete specific work for you (which does not happen regularly).
Weigh all the options and see whether you can save long-term by hiring a freelancer, or if it makes sense to invest in a highly talented employee whose diligence and work ethic will generate more profit than costs.
The issue of 1099 vs. W2 has been increasingly popping up in the news, as more employers are beginning to switch to an increasing proportion of contractors so they can spend less on staffing. As an employee, it is essential to understand the distinction and know what your rights are as a worker. As an independent contractor, you do tend to charge more per hour, but it is because you have to cover more costs. For example, you will pay twice as much in Social Security and Medicare (FICA) taxes, because employers would typically pay half. 1099 contractors are also required to by their own health insurance, cover work expenses like a desk, computer, and save up on their own for a retirement fund.
While it might seem like it is a huge disadvantage for you to work as a contractor, there are some advantages. As a 1099 contractor, you receive more tax deductions like business mileage, meal deductions, home office expenses, work phone, and internet costs, as well as other business expenses that can lower your taxable income. Therefore, contractors might end up paying fewer taxes than a traditional employee would. In addition, independent contractors have access to higher SEP IRA deduction limits, which allows them to invest more at a pretax basis, which is similar to a 401(k).
Before signing a contract with a new employer, ask yourself if you will be controlled on what work is done, and the method in which you are doing the work. However, if the result of the work is the only thing that is controlled, and not the means of accomplishing the goal, then you can legally be classified as an independent contractor. This distinction is important because miss-classification is illegal, and could result in hefty fines and penalties.
Ultimately, whether or not you agree to work as a 1099 contractor of a W2 employee depends on your personal skills. A 1099 contractor will often have a more complex skill set than other typical employees, and are used infrequently. They might also work for multiple clients, and therefore have more freedom over their work schedule because they are not required to work under a 9-5 schedule.
Both employers and employees should consider the type of employment before agreeing to any form of work. Both 1099 and W2 have pros and cons, and it depends on your unique business needs.
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