Hiring people to work for your business can be a daunting task, especially when you're trying to decide between bringing on a contractor or a full-time employee. While there are plenty of things that go into making this decision, like how many hours they work and if they're considered an employee or independent contractor, choosing the right one will help save you money on taxes—and in other areas too.
What is the difference between 1099 contractors vs. W-2 employees?
If you’re not sure what the difference between a W-2 employee and 1099 contractor is, you’re not alone. Many business owners are confused by this distinction and end up making mistakes that could impact their company’s future success.
The difference between W-2 and 1099 employees is the legal classification of each.
- A W-2 employee is a person who works for an organization that employs workers on a full-time basis, pays them a salary, covers all deductibles (including health insurance) and taxes them at the end of each year through Form W-2 filings with the IRS based on income paid during the previous year.
- A 1099 contractor is self-employed and receives a 1099 contract for services rendered rather than an official W-2 form from an employer. They're also referred to as independent contractors or freelancers.
Read more: The Difference Between Exempt and Non-Exempt Employees
Advantages of hiring a W-2 employee
W-2 employees give you some great tax advantages. You can deduct their health insurance, retirement and other benefits, as well as meals and travel expenses.
- You can deduct the cost of the employee's health insurance.
- You can deduct the cost of their retirement plan.
- You can deduct their uniforms, if they're required to wear them in the course of their job duties.
- You may be able to deduct travel expenses related to your employee's business trip.
Advantages of hiring a 1099 contractor or freelancer
If you're looking for flexibility and less paperwork, a 1099 contractor might be the right solution. There are several advantages to hiring 1099 employees.
- Your company is not responsible for taxes or withholding.
- You don't have to offer them benefits.
- You can hire someone who is needed temporarily and on an intermittent basis for a specific project or task.
What are 1099 and W-2 tax forms?
The difference between a 1099 form and a W-2 form is simple: one reports payments made to an independent contractor, and the other reports wages paid to an employee.
- 1099 forms are used to report payments to independent contractors.
- W2 forms are used to report wages paid by employers to employees.
If you're confused about whether your worker is an employee or not, the IRS has an easy test: if your business deducts taxes from their paycheck before they get paid in full, then they're more likely to be considered an employee (and you'll have to issue them a W2).
1099 or W-2: Which will benefit my business best?
When it comes to hiring employees, you may wonder which type of employee is best for your business: the W-2 or 1099? In the end, both types of employees have pros and cons, so it’s important to examine your company's goals and needs before deciding whom to hire.
If you want more flexibility with how much time someone spends on your team, then you might want to go with a 1099 contractor who doesn't need any benefits or payroll taxes taken out.
On the other hand, if you're looking for loyalty or stability within your company's ranks, then hiring W-2 workers could be just what you need!
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