Most businesses want to be flexible when it comes to who they hire. In addition to employees, they may also hire independent contractors for various tasks. However, some business owners are concerned about the consequences of having too many 1099 employees, and want to know the advantages of hiring them versus W2 employees.
1099 Employees are Not Employees
Any worker you send a 1099 to is not an employee; they are a contractor. Referring to them as an employee puts you at risk of getting into trouble with the IRS. Confusing the two can lead to a situation where you’re forced to deal with unemployment claims. One advantage to hiring a 1099 vs. W2 is that for contractors the company doesn’t have to withhold their income taxes, social security or Medicare.
Additionally, employers don’t have to worry about paying for unemployment taxes. Independent contractors have the advantage of getting a larger paycheck since they are not subject to the withholding that they would experience as employees.
The Advantage of W2 Employees
One advantage of hiring W2 employees is that you don’t have to worry about the IRS or other government agencies challenging the validity of the classifications you make. A business owner that calls an employee a contractor is subject to all sorts of problems, including lawsuits and audits. The reason for this is because by making such a misclassification the employer gains money that should go towards the government. It is for this reason that both state and federal laws are clear about the distinction between an employee and contractor.
Knowing the Difference between the Two
Contractors have a number of variables which determine their classification, and some of these include the type of work they perform, the deliverables, the time they need to complete the work, and the location in which the work is performed. The IRS has a number of published guidelines which can help business owners know the differences between 1099 workers and W2 employees, and they are willing to help companies free of charge. Obtaining this service will require business owners to complete and send the IRS Form SS-8. At the same time, it is important to remember that state law may differ from federal laws.
There have been cases where contractors will request unemployment benefits from the state government after their contract period are completed. When the government reviews this request and determines that no earnings have been reported for this individual, this leads to an investigation, and if the employer has misclassified them, they will be responsible for making payouts that involve lost wages, unpaid overtime and other benefits.
Companies of all sizes are vulnerable to paying huge fines if they misclassify their employees, and some examples of big companies that have been hit include Time Warner and Microsoft. Therefore, business owners who are considering hiring independent contractors must weigh the potential costs with the benefits. While a great deal of money will be saved in the short term due to less paperwork with no need to pay employee benefits, problems can occur later if misclassifications occur.