Employee vs. Contractor: What’s the Difference?
Cynthia Franklin | August 16, 2021
There are two ways to categorize your workers: W2 or 1099. What’s the difference?
If you are a growing business, one of the most exciting milestones you can reach is hiring your first employee or contractor. You can finally free up some of your time to work on growing the business or finding new customers.
But hiring and paying workers comes with a new set of questions, such as… Should I classify my new worker as a 1099 contractor or W2 employee? Am I required to pay benefits? Am I required to keep track of hours?
Additionally, wages are almost always the #1 largest expense for a small business owner – so if your workers do not contribute to additional sales, your profit margin may suffer.
Here is a breakdown of the difference between W2 and 1099 employment types.
A W2 employee is a worker with a distinct advantage. They receive half of their FICA tax (Social Security and Medicare) paid for by their employer. So you’ll be on the hook for those, along with additional taxes such as state and Federal unemployment tax.
As a trade off, the W2 employee works on the schedule that you implement, and does not have control over the work they will perform. This allows you as the employer to have greater control over your workers duties and timeframes. It also allows you to enforce a non-compete agreement with your employees and protect trade secrets.
Hiring W2 employee is an entailed process. First, if you have never hired employees before, you will need to register as an employer in the state where your employee works, including:
In contrast to hiring W2 employees, some business owners choose to hire workers as independent contractors. Instead of paying for half of the FICA tax, contractors will pay their own taxes in full. The employer will not be required to pay unemployment taxes or register as an employer. They also do not withhold income taxes from workers’ paychecks, so the independent contractor must estimate and pay their own income taxes quarterly.
The IRS stipulates that 1099 contractors must:
How We Can Help
We can help you keep track of payments to employees, vendors, and contractors. We can also provide referrals for payroll specialists and benefits administrators. Book a free discovery call today to learn more.