Employee Classification: Independent Contractor or Employee?

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So you’ve decided to hire someone because your business is growing…that’s fantastic! Now you need to make a decision on who to hire: a W-2 employee or a 1099 independent contractor?

Let’s compare the difference between each employee classification…

W-2 Employees

W-2 employees are what most business owners think of when they decide to hire. It’s not the least expensive option, but W-2 employees provide a lot of benefits.

With a W-2 employee, an employer has more control over setting work schedules and evaluating and directing an employee’s work.

By hiring a W-2 employee employers can help employees develop and grow, and in return, an employer will hopefully receive a loyal and dedicated employee.

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With W-2 employees comes costs. They will cost you money and time during the recruitment process. It is important to find the right employee for each of your positions.  Employers need to pre-determine how the position fits within  the organization and what education and skills an employee needs. In addition, an employer is responsible for:

  • providing the employee with a consistent wage
  • paying federal and state employment taxes
  • paying state sick leave requirements
  • paying for workers’ compensation
  • paying for office space, computer licenses, and equipment

In order to retain a W-2 employee the employer may also want to consider providing:

  • health benefits
  • a retirement plan with a matching contribution
  • paid time off (PTO)
  • and other “nice to have” perks to attract and retain the right employees

1099 Independent Contractors

A 1099 independent contractor might be the right choice when you have a short-term or distinctive project that’s not necessarily the focus of your business. For example, you may need someone to create your website, handle a marketing launch, or write your employee handbook. These are project related items that you need for your business, but often times are things that you may not need someone to do every day. It is important to have a Contractor Agreement that outlines the specifics items of a project, the project timelines and the payment schedule for the work completed. This agreement needs to be signed by both the employer and contractor before any work begins.

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With hiring an independent contractor, the employer does not have the federal and state tax obligations, sick time requirements, workers’ compensation responsibility or the other financial obligations that come with hiring a W-2 employee. By starting in an independent contractor role with a new employee, it can also give you a “try-before-you-buy” choice to see if the contractor fits within your organizational culture, works well with you and your employees, and whether or not you would like to offer them a regular W-2 employment opportunity.

Independent contractors are responsible for paying their own self-employment taxes as outlined by the IRS.

An independent contractor can be paid on an hourly or project rate. There also may be times when an independent contractor prefers an upfront deposit with the remainder paid at the completion of the project.

Frequently Asked Questions

Can a 1099 independent contractor work exclusively with my company?

If an independent contractor only works for you, then you should consider hiring them as a W-2 employee. An independent contractor generally will be working with 2 to 3 employers simultaneously.

Do I need to provide workers’ compensation to a 1099 independent contractor?

The Independent contractor is required to pay for themselves and any other employees they hirer to complete the project they are doing for an employer. In the Contractor Agreement, workers’ compensation should be itemized as the contractor’s responsibility.

For a W-2 employee, the employer is required to provide workers’ compensation and cover work-related injuries.

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Does loyalty differ between a W-2 employee and a 1099 independent contractor?

A W-2 employee may be more vested in the success of your business because you’ve invested in them. By providing them with a steady income, you’ve shown that you want them to grow, learn and be a part of your company.

For a contractor, they’ll be invested in your company for the duration of their project. After a project is completed, a contractor  may  turn down future jobs based on their availability. They have an easier time parting ways after a project comes to a close, which can also be seen as a positive for employers as they don’t have to worry about the liability of terminating a contractor.

Will hiring a 1099 independent contractor affect workplace culture?

As a business owner, you’ve worked hard to develop a good work environment. Your employees understand your business and culture. Your employees are more in tune with the day-to-day workplace culture. Independent contractors aren’t always present in the day-to-day operations and office environment, so it may take a little more communication and time to get them up to speed with culture.

How do I maintain good communication with a 1099 independent contractor?

An employer knows how to get a hold of W-2 employees. They have a more direct line of communication, especially if working in the same office building. With a contractor, you’ll need to make more of an effort to reach out and ask when they will be in the office or on a job site. Scheduling a consistent daily or weekly check-in can bridge communication gaps.

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Do you need help with employee classification?

Classifying employees correctly is an important decision employers need to make to ensure their employees are classified correctly.  We, at Aliat can help you with making these decisions and ensuring your employees are classified correctly. If you need employee classification assistance to figure out whether a W-2 employee or a 1099 independent contractor is best for your company, please request a consultation and our HR pros can help. You can also reach out through email at hr@myaliat.com