Form 1099 is the form used to report payments to individuals not covered by a payroll tax or withholding program. “Contractors” or independent self-employed persons receive this report for their income.
Companies must send a W2 to employees on the payroll, but with independent contractors, there’s no payroll tax. Instead, companies send the 1099 form and any necessary attachments to the contractor, and he or she will declare and pay their taxes, including income tax, Social Security, and Medicare.
Employees vs. Contractors: Knowing the Difference
The key difference between a worker hired as a W2 employee and one hired using a 1099 form lies in their job status, tax duties, and relationship with the hiring company. W2 employees are direct hires who work under the company’s management and follow set schedules and business rules.
The employer takes taxes from paychecks, provides benefits, and gives legal protections. On the other hand, 1099 contractors are self-employed persons or firms employed for specific services or projects. Contractors have more independence, pay their own taxes, lack employee perks, and handle their own legal and financial risks.
Deciding on the proper classification is essential to avoid legal issues and make informed hiring choices.
When to Hire Contractors?
Hiring contractors is an effective way to accomplish some work on the budget. Some business executives are in heavy demand and need specific skills in high supply or spots, preventing them from securely adding employees.
They can hire contractors to avoid the costs of:
- Payroll taxes
- Unemployment insurance
- Liability risks
For example, hiring photographers, web designers, software developers, and medical billing and coding specialists can be more cost-effective with contractors than W2 employees.
By contrast, manufacturing jobs, along with office support staff, often are more commonly employees on the payroll. Contractors are not employees, nor are they generally covered by workplace regulations.
To sum it up
When comparing a W2 employee and a 1099 contractor, consider the advantages of each type of worker and the specific functions you want him or her to handle. Before all else, accounting, legal, and HR officers must consider when hiring W2 staff members as opposed to contractors which one better fits the job requirements.
Both approaches yield certain benefits, costs, and risks. So long as you as an employer are fully aware of the difference between W2 and 1099, both paths toward hiring can be incredibly beneficial.