Can we be honest with each other? Managing human resources is outright one of the most challenging parts of running a business.
Without a dedicated HR or smoothly running WFM system, all of the strenuous work falls on the employer - and that includes implementing a great onboarding process to minimize turnover, creating schedules that are agreeable with everyone, administering payroll, ensuring high employee engagement and job satisfaction, and other vital HR tasks.
In addition to the time spent on these responsibilities, the monetary costs of staffing and employment can be steep. So when it comes to classifying employees as 1099 and W2 employees, which one of these do employees and employers prefer?
Breaking Down the Difference: 1099 vs. W2
Let’s start by quickly breaking down the ABCs of 1099 and W2 employees. Both are aptly named after their respective tax forms: independent contractors file Form 1099-MISC while employers file Form W2 on behalf of their employees.
a person employed as an independent contractor
Examples: healthcare professionals, real estate agents, lawyers, accountants
Simply put, 1099 independent contractors define the terms and services of their work in a written contract between themselves and their employer. They are paid according to the terms of their contract, report their own income on their tax return, and are able to serve as many clients as they want - thus, rightfully named “independent” contractors.
a person employed for wages or salary at a company
Examples: receptionist, community manager, sales representative, front desk worker
W2 is the go-to classification for a salary-receiving employee at a company. A W2 employee receives a regular salary and enjoys employee benefits, insurance protections, and automatic payroll tax deductions.
Laying Out the Pros and Cons
The Employee View: W2
Employees enjoy a great deal of benefits when they are hired and classified as W2. For starters, a W2 employee is employed by a company - they’re part of a team. That means that they participate in employee benefit programs and receive all of the perks that come with that, including health insurance, retirement conditions, and even flexible spending accounts. They are guaranteed at least minimum wage (set by both federal and state laws) and cannot be let go for invalid or discriminatory reasons.)
Reports show that there are 109.7 million full-time wage and salary (W2) workers in the US.
The Business View: W2
Employers can utilize a W2 employee’s work according to the business’ needs and scheduling demands. W2 employees must also be provided with all the necessary tools and supplies to support their job, which, while useful and efficient, can also be timely and expensive for employers. Employees are also typically reimbursed for business and other expenses (travel, tip, etc.) while independent contractors are typically not (unless specifically outlined in the contract.)
The Employee View: 1099
1099 workers don’t enjoy the same employee benefits that W2 salaried employees do, but they do get other types of perks, primarily: flexibility and independence. 1099 workers have the ability to work flexible schedules, choose their own hours and availability, and decide who they work for, the frequency, and work for multiple projects at the same time.
Only 41% of contract workers receive health insurance through their employer.
The Business View: 1099
One of the major advantages for employers when hiring an independent contractor is the low legal and financial responsibility. Not only do 1099s work and receive pay according to the terms of their agreement with their employees, but they also pay their own taxes. This means that employers don’t need to file and pay payroll taxes for 1099 workers. As previously mentioned, employers are also not required to provide 1099 workers with the same benefits that W2 salaried employees receive, saving time and money on operational and financial processes.
10.1% of the workforce are independent contractors (according to the latest report by the BLS, released in June 2018.)
Can An Employee Be Both W2 and 1099?
In short, the answer is yes. An employee can be hired by an employer as a salaried employee and also work as a 1099 contractor on an independent basis.
Rarer to find is an employee working as both a 1099 and a W2 under the same employer. The employee would need to receive both forms from the same employer, and would need to work the regular work week under the W2 contract, and also perform work that differs from that job, at different hours (for example, if the employee performs work that would otherwise be paid with a 1099 if done by someone who was not an employee of the company - aka, a freelancer.)
Contract work actually makes up 20% or more of the US workforce, according to research by NPR/Marist, contradicting the report by the BLS. The Labor Department did not take into account individuals who didn’t work within the week the research was conducted, excludes many who work for online platforms and apps, and also doesn’t include individuals working at another primary or W2 job.
How are 1099s and W2s related to Prop 22?
Remember Prop 22? Proposition 22 was passed in California in November 2020, essentially giving Uber, Lyft, DoorDash and other delivery companies the ability to reclassify their drivers as independent contractors.
This was a huge paradigm shift for 1099 employees, or independent contractors, working in the gig economy. It means that these workers get more flexibility when it comes to work hours and schedules, control their taxes and choose their own insurance.
However, as noted above, it also means that these 1099 workers are giving up access to certain employee benefits and protections that they would be receiving as W2 employees.
Tips for Employers
This past December 2020, the Internal Revenue Service issued a reminder to employers to file Form W-2 and other wage statements by February 1, 2021, to avoid penalties and help the IRS prevent fraud. Normally, these forms and statements must be filed by January 31, but since this year falls on a Sunday, the due date has been pushed to Monday, February 1.
Proactive planning and advance preparation can help businesses avoid issues that may arise later. You can:
- Get an early start: update employee information like names, job titles, addresses, wages and other personal information
- Screen gaps: start filling in holes in scheduling and open job availabilities with the right employment types and titles
- Be compliant: ensure your company’s account information is current and active with state and federal laws
What do you think is the best fit for you, 1099 or W2?