What is a W2 employee?

May 30, 2023

When hiring workers, businesses have to choose between W2 employees and independent contractors. This is a crucial decision that affects the costs, benefits, risks, and opportunities for both the business and the worker.

According to the Internal Revenue Service, whether a worker is an employee or an independent contractor depends on three categories: behavioral control, financial control, and the relationship of the parties.

Workers on a W2 payroll work directly for the company. They receive a W2 form, and the employer must withhold taxes like income tax, Social Security, and Medicare pay unemployment tax.

The employer is responsible for benefits and must follow labor laws for W2 employees.

This is different from Contractors; they get a 1099 form instead. They are self-employed and handle their own taxes. 

When to Hire An Employee?

Hiring a W2 employee can be a great idea when you need long-term help with specialized skills, are in a heavily-regulated industry, or need skilled employees who require more than one type of skill or training. 

Traditional employees will usually offer more stability and fewer surprises. It’s usually best to hire a W2 employee over a contractor if: 

  • You need persistent help with an ongoing project due to the employee being monitored closely.
  • You need to provide on-the-job training or instruction since employees have steady hours. 
  • You’re in a heavily-regulated industry.
  • You need someone that will be able to focus on one type of task or skill for a prolonged period of time. 

Tax Credits and Deductions

Hiring W2 employees can also make a company eligible for certain tax credits and deductions. For example, businesses can claim the Work Opportunity Tax Credit of up to $2,400 for hiring workers from targeted groups like veterans and disabled individuals.

There are various tax credit programs, both at the federal and state levels, created to motivate investments in redevelopment projects, affordable housing, particular industries, and communities of all sizes. 

To Sum It Up,

Ultimately, the choice between hiring a W2 employee or an independent contractor depends on the project and the nature of the relationship between employer and employee.

While W2 employees cost more upfront, the long-term benefits often outweigh that for many firms. Employees who grow within the company can become extremely valuable. But for some roles, contractors continue to make sense. 

Independent contractors offer a greater degree of flexibility and are suitable for short-term projects or tasks that don’t require specialized training or ongoing services.

Companies must weigh the pros and cons of their situation. They should also consult with a tax professional and follow the legal guidelines for worker classification.

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