Both business owners and employees should know the differences between W2 and 1099 workers. Each comes with pros and cons to consider when looking for work or to hire someone.
As an employer, you might be wondering whether you should hire a W2 or 1099 employee. W2 and 1099 forms are the different kinds of tax forms used to process income taxes and other work-related taxes.
Which employee type you choose will primarily affect the way your company does taxes, but there are some other important differences to consider as well.
Understand the Difference Between 1099 vs W2 Employees
The primary difference between 1099 vs W2 employees is the different tax forms they each fill out. But there are other important differences between the two as well.
The terms W2 and 1099 refer to two different kinds of tax forms that workers and employers use each year. Employers have to fill out tax forms each year for income tax and any other taxes that apply to their workers or their business. People who work for themselves have to handle these taxes on their own with a 1099 tax form.
Employees who need a W2 tax form are employees of the company. They work directly for a specific business. The company they work under puts together their W2 tax forms and sends the IRS the appropriate tax funds each year.
Workers who need a 1099 tax form, work for themselves instead of working for a company. This means they have to do their own income taxes each year and they do this by filling out a 1099 tax form.
Because W2 employees work for a specific business they usually end up working on location. This means working at the store, at the worksite, or in the office.
Meanwhile, 1099 workers have to find their own workspace. This means that they are in charge of providing themselves with computers, desks, chairs, and whatever else they might need in order to do their job.
The way that different types of workers get paid is also different. W2 workers always get paid from the same company, while 1099 workers get paid from whoever they are currently working for.
Since 1099 workers are contract workers, they get paid per contract and often end up working for multiple different companies. This can also mean that contract workers have more sporadic pay while regular employees can often expect more stable pay.
What is a W2 Employee?
A W2 employee is someone who is hired as a full or part-time worker for a business. That company then needs to pay taxes for each employee they hire. Those taxes get filed using W2 forms.
What is a 1099 Employee?
1099 employees are contract workers that file their own income tax forms at the end of each year. They work independently from the company's they work for and have to manage their own taxes and benefits.
1099 employees are self-employed workers. They can also be referred to as independent contractors or contract workers. This type of self-employed worker usually works in an independent trade as their own boss.
What Qualifies as a 1099 Employee?
1099 employees can work in many different kinds of professional fields. Some examples of common types of 1099 employees include:
- Real estate agents
- Graphic designers
- Web developers
1099 Employee Rights
Self-employed workers have specific employee rights they need to remember. Because they are self-employed, they have to be in charge of their own employee rights since they aren't a part of a business's HR department.
This is why contracts are especially important for contract workers. The contract will be the main way contractors can protect themselves professionally and make sure their terms are met at each new job they take on.
1099 Employee Benefits
Companies can get a lot of benefits from hiring a contract employee rather than hiring an in-house employee.
For one, companies that use contract workers don't have to pay income taxes, medicare taxes, unemployment taxes, or pay social security for each contract worker they hire. Instead, contract workers have to manage those taxes on their own.
By hiring contract employees, companies can potentially save lots of money while still getting exceptional work done.
Contract employees also experience lots of benefits. They don't have to work in the same office every day and they don't have to work during hours that someone else sets. Overall, 1099 employees benefit from more flexibility in their work and the way they handle their own taxes.
What are a 1099 Employee's Rules?
Independent contractors make their own employee rules. They'll often outline any of the rules or guidelines they want on a project in the contract they write up for the person or business hiring them.
Setting these rules in writing in a contract is a good idea because it lets everyone know exactly what is expected of them.
Can you Collect Unemployment if you are a 1099 Employee?
1099 employees are not eligible for unemployment. In order to be eligible for unemployment, you or the company you work for must pay taxes that go toward the unemployment insurance fund.
Since independent contractors don't work for a company that pays taxes and instead work for themselves, they aren't eligible for unemployment benefits.
Advantages of Being a 1099 Employee
In 2014, there were about 91 million 1099 employees. There are many self-employed workers in the world and they choose to work this way for a reason. Working for yourself comes with a lot of awesome perks.
As a self-employed worker, you get to determine your own hours. If you want to work from 9:00 AM to 5:00 PM each day you can. You can also work from 5:00 PM to 1:00 AM if you want! Your hours are completely up to you.
You can also decide not to clock hours for your work and instead base your pay on completed projects and tasks. It's all up to you because you are the boss.
Decide Your Own Pay
When you're the boss, you get to decide everything. That includes how much you get paid and when you deserve a raise. You do have to consider hireability when deciding how much to charge for your work.
File Your Own Taxes
Because you file your own taxes each month, you now have the power to manage your own tax situation and potentially save a lot of money.
Self-employed workers can also be eligible for special tax exemptions that can help you save even more on taxes each year.
More Work Variety
Working for lots of different people can help work be way less boring. Each project you take on will be different from the last, even if the work is similar. This can help keep you engaged and interested in the work you do so you don't have to fight back job burnout as much as you might working for one company alone.
Contract workers sometimes have to work on-site. Real Estate Agents will have to travel to different houses to show clients or photographers have to be on location to take photos.
But other than those types of instances, people who are self-employed get to work in their own personal space. Working remotely can be great, especially when you customize and personalize your workspace.
Some independent contractors will also rent their own office space. So just because you work on your own, that doesn't mean you have to miss out on going to a set office location each day if you want to.
No Earning Limits
When you work for yourself there are no limits to how much you can earn.
As a hired employee, you might have a cap on how much you get paid each month or how many hours you're allowed to work each week. As a 1099 employee, you don't have this limit. Instead, you can work as much as you want and subsequently earn as much as you want.
Disadvantages of Being a 1099 Employee
Everything that has pros also comes with some cons. Here are a few of the disadvantages you'll need to weigh before deciding to become a 1099 employee.
More Tax Filing
You have to keep up with taxes on your own each month, otherwise, it'll accumulate and you'll owe a lot when tax season comes around. Having to file your own taxes each month can be burdensome and time-consuming.
Find Your Own Work
You have to advertise your products and services in order to find work. This means that your work is subject to a certain amount of supply and demand.
This can make contract work less dependable than a regular job that promises a certain number of hours each week.
Income and work hours can be unsteady for someone who is self-employed. Your products might not sell or you might have trouble finding people to hire you for your services.
You might have periods where you get lots of work and other times where you don't. This can make your income less stable than a regular job that promises a certain number of hours and pays on a regular basis.
No Employee Benefits
As someone who is self-employed, you have to take care of a lot on your own. Insurance and other employee benefits are some of the things you'll have to handle on your own.
If you work for yourself, then you can take a vacation whenever you want. But you won't technically have any paid vacation days or paid sick leave. You'll also be in charge of your own healthcare and insurance whereas many regular jobs will connect their employees to healthcare and insurance programs.
Advantages of Hiring a 1099 Employee
As a business, it can be difficult to decide which is better—hiring an independent contractor or hiring an in-house employee. All of this depends on the work that needs to be done and your business.
There are many ways your business can save money by hiring an independent worker. You don't have to pay employee taxes for self-employed workers. Instead, you just pay them the fees they charge.
You also don't have to provide employee benefits to someone who is self-employed. They also don't need you to provide them with a workspace or materials to do their job.
Skip the New Hire Process
The process to get a new hire all situated at your business can be expensive and time-consuming. Skip this process altogether by hiring an independent contractor instead.
Change Services Easily
If you find you don't like someone's work, you can just not use their services again. But if you hire a new employee, you'll have to formally fire them in order to replace them. With an independent contractor, you can just try someone new for the next project.
Disadvantages of Hiring a 1099 Employee
It's not all good news for small business owners though. There are instances still where it would be better to hire a W2 worker instead of a 1099 employee.
There is a possibility that a freelancer's time could be divided between other clients. They don't only work for you which means they could be juggling many more projects at the same time they take yours on. This divide in their time and focus could mean lower work quality for your business or at the very least, longer completion times.
But if you hire an in-house employee, then you can see and work with them every day for easier and more frequent collaboration.
You can make requests when forming a work agreement with a self-employed worker, but ultimately they are their own boss. This could give your business less control over a project.
How Check City Supports You and Your Business
Whether you are a small business or an independent contractor, Check City can help you with your financial needs.
Need Help Filing 1099?
At Check City, we can help you file your taxes all year round! At Check City, you can get your federal and state tax returns filed at any time of the year.
Check City has over 30 years of tax preparation service experience and requires no appointment. Come into a store at any time and our tax representatives will help you get your taxes done.
Need Emergency Funding as a Business Owner?
Check City has financial services that help small business owners. If you are a small business owner in need of emergency funding then head on over to Check City to see our small business loan options.
Loans For Self-Employed
Sometimes all you need is a small loan to keep afloat or get through a small financial setback. Payday loans are one of the more popular types of small loans you can get when you just need a little cash to see you through.
But if you're self-employed, you might wonder what small loan options are available to you if you don't have a steady paycheck for a payday loan. There are still loans for self-employed workers though, like a personal loan!
Different workers thrive under different conditions. If you love flexibility and being your own boss then becoming a 1099 employee might be the right choice for you. But if you thrive on structure and stability then becoming a W2 employee might be the better choice for you.
Likewise, there are pros and cons to hiring 1099 employees and W2 employees. With 1099 employees your company could save money, but with W2 employees you get the in-house time and attention your company might need.
Whether you're a business owner looking to hire or a worker looking for a job, considering the advantages and disadvantages of 1099 employees can help you figure out your best options.