W-2 Employees vs. 1099 Contractors

Updated on January 17th, 2022

At some point in your business, you will need to bring in others. Success as an entrepreneur means that you eventually have to learn how to delegate effectively. I began using a virtual assistant to manage my social media posts when I was trying to find a way to free up more time for essential business tasks.

When you start delegating, you need to decide whether you will begin outsourcing using independent contractors, or whether it makes more sense to hire full-time or part-time employees to do more regular tasks.

Before you make your decision, it’s important to understand the distinction. Some business owners try to take advantage of the situation by claiming employees are 1099 contractors. The reality, though, is that the government is very clear about what constitutes W-2 employees vs. 1099 contractors.

W-2 Employees

One of the reasons that it can be tempting to avoid classifying workers as W-2 employees is due to the fact that you have to pay a portion of your employees’ payroll taxes. You might also need to provide certain benefits. With 1099 contractors, you don’t have to worry about these costs.

You can’t just classify an employee the way you want in order to save money, though. The IRS has a way of determining W-2 employees vs. 1099 contractors that includes behavior, financial, and type of relationship. Essentially, it comes down to control. If you control most aspects of how a worker completes his or her tasks, you’re talking about a W-2 employee.

If you control when the worker comes in and leaves, when you have rules about how the work should be completed, as well as the tools used to complete the work, you’re talking about a W-2 situation. The more control you have over the worker, the greater the chance that you should be issuing a W-2.

1099 Contractors

One the other hand, independent contractors have more control over how they complete their work. One of the reasons I love being a freelancer is that I have location independence and control over my schedule. When you hire a contractor, you can specify a deadline, but you can’t insist that the freelancer spend a certain number of hours on your project each day, or that they be available at set times. You also can’t demand what tools are used for the project.

On top of that, independent contractors have more freedom to work for your competitors or take other work. The relationship is more fluid and might be negotiated on a project by project basis. You aren’t paying hourly or an annual salary. Instead, you agree on terms for a limited time, and when those terms are fulfilled you renegotiate for the next project.

Carefully consider the requirements you have of the people you hire to work for you. My VA is a 1099 contractor: she can complete the work on her own time, and in her own way — and I only pay her for the work she does. Understanding the classification of W-2 employees vs. 1099 contractors is important if you want to avoid IRS penalties.

Miranda Marquit

Miranda Marquit

I'm Miranda and I'm a freelance financial journalist and money expert. My specialties are investing, small business/entrepreneurship and personal finance. The journey to business success and financial freedom is best undertaken with fellow travelers.

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