1099s vs. W-2s: Which Should I Hire? (2024)

What’s the difference between 1099s and W-2s?

W-2s (employees) and 1099s (independent contractors) get their names from the tax forms they receive each year—the W-2 and 1099-MISC, respectively.

A W-2 employee receives a salary and benefits, has taxes withheld from their paycheck, they generally work in the place you provide for them, and their work is related to the core of your business.

1099 contractors have more control over their work, are paid hourly or by project, and they have to pay their own self-employment taxes.

Further reading: The Difference Between Independent Contractors and Employees

But which one is better for your business?

1099s vs. W-2s: the pros and cons of hiring each

1099s are cheaper, usually

In most cases, 1099s are cheaper to hire than W-2s. You don’t have to pay 1099s health insurance, life insurance, bonuses, stock options, or 401(k) contributions. You also don’t have to pay for their training, their downtime, or their worker’s compensation.

That being said, there are situations where hiring a W-2 is cheaper. Salespeople, marketers, software developers and other independent professionals can charge high hourly fees. If the work they do is core to your business, and you’re paying them for enough hours a week, it could be cheaper to bring them in-house as a W-2.

1099s don’t require payroll tax withholding

For W-2 employees, you’ll need to withhold and remit payroll tax, including Medicare, Social Security, and income tax.

This will usually involve using payroll software or having an administrator run payroll for you.

For 1099s, all you have to do is cut a check and file a 1099-NEC at tax time.

1099s have less regulatory burden, usually

W-2s are protected by all kinds of employment laws, like the Fair Labor Standards Act (FLSA), the Occupational Safety & Health Act (OSHA) and Title VII of the Civil Rights Act. In many cases, hiring a 1099 can simply be less of a regulatory burden.

That being said, sometimes it’s the other way around.

As more companies replace W-2s with 1099s, the Department of Labor and the IRS have stepped up their efforts to crack down on “misclassification”—when employers hire and compensate someone like a 1099, but control their work like a W-2. The IRS says misclassification is a form of tax evasion, and will come after you for the unpaid employer and employee portions of payroll taxes, Social Security, and Medicare if they discover you’ve done it.

In recent years, the IRS has been known to automatically investigate the independence of 1099s that report more than $10,000 in income, using an algorithm.

And remember: just because someone works remotely, signs a contract, pays for their own office supplies and receives a 1099 form doesn’t mean they’re a 1099. According to the U.S. Department of Labor, “employers may not misclassify an employee for any reason, even if the employee agrees.”

1099s are more flexible (but you have less control)

It’s usually easier to end a relationship with a 1099, especially if you make that part of your contract. If your employment needs are unpredictable—because your business is highly seasonal, for example—it can be easier to hire 1099s.

At the same time, in some states, “at-will” policies can actually make it easier to fire a W-2 than a 1099 you’ve signed a contract with. And the fact that you control a W-2’s day-to-day work means that you have more room to change course and halt their work if you think it’s going poorly.

W-2s are better for the long-term

Because W-2s usually need to be trained and incorporated into office life, it can take a while before they’re ready to do productive work for you. 1099s, on the other hand, are used to getting started on projects right away. If you’re growing and you need immediate results, you might want to hire 1099s.

If you’re looking for results in the long run, however, W-2s are usually the way to go.

W-2 job postings tend to attract higher-quality applicants who are more willing to commit to your business for the long haul. Because they aren’t constantly looking for other work, they can also focus better on the task at hand.

If you’re looking to build a cohesive team with a robust company culture, a group of happy W-2s is usually going to be a better bet than a constellation of remote 1099s. And if your company is growing and you ever need managerial help, it’s also more useful to have a W-2 around who knows your business than it is to hire an outsider.

W-2s are better for core business work

If someone is doing work that is non-essential to your business (like graphic design, copywriting, accounting, etc.) hiring a 1099 to do it can be cheaper, quicker and less of a regulatory burden.

If the work you need done is core to your business (like marketing, client relationship management, any managerial work, etc.) hiring a W-2 to do it might make more sense from a long term, work culture perspective.

1099s vs. W-2s: a pros and cons summary

1099s (independent contractors)W-2s (employees)
CostPros: Cheaper in most cases, because you don’t have to pay them benefits.

Cons: High hourly cost.

Pros: Sometimes cheaper, especially if you’re paying them to work full time.

Cons: More expensive in most cases.

RegulationPros: Less regulated by federal employment law.

Cons: Heavy penalties if you misclassify a 1099.

Pros: No risk of misclassification.

Cons: More protected by federal employment law.

FlexibilityPros: Easier to end relationship, better for unpredictable/seasonal work.

Cons: Less control over short-term work.

Pros: Easier to control work on a day-to-day basis.

Cons: Harder to fire if protected by employment law.

Short term/long term resultsPros: Can start work immediately.

Cons: Might not be as loyal/committed in long run.

Pros: More focused, dedicated in long run.

Cons: Need time to get trained.

Work functionPros: Better for work that isn’t core to business.

Cons: Might be too expensive for core work in long run.

Pros: Better for work that is core to your business.

Cons: Too expensive if the work is temporary or not core to your business.

How to figure out who you should hire

Calculate how many hours you need them to work every week

Different organizations have different definitions of what it means to work for someone “full-time.” The IRS says it’s anyone who works for you more than 30 hours a week, whereas the U.S. Bureau of Labor Statistics says it’s anything above 34 hours. Generally speaking, if you need someone to be around for more than 30 hours a week, you should hire them as a W-2.

On the other hand, if you know that the position you’re hiring for isn’t a long-term one (i.e. a few months or less), you should hire a 1099.

Calculate how much you can spend on them

Once you’ve decided how long you need to keep them around for, you need to figure out how much you’re willing to pay them.

1099s can sometimes charge you more per hour than W-2s, but if you’re keeping them around for a while, a W-2’s benefits can add up.

Hiring a 1099 at an hourly rate, a 1099 at a flat per-project rate, and a W-2 at an hourly rate can each end up being cheaper if the circ*mstances are right. Figure out how much each option will cost you, and pick the least expensive one.

Decide whether they need to be in the office

Once you’ve figured out their time commitment and rate, you have one more factor to worry about: will this person work best remotely or working with you in-person?

If you think the position you’re hiring for lends itself better to remote work—because it isn’t core to your business, and doesn’t require the worker to meet/collaborate with other employees—hire a 1099.

If the work is collaborative, however, or related to your core business in some other way, it might be worth hiring them as a W-2, at least on a temporary basis.

1099s vs. W-2s: Which Should I Hire? (2024)


1099s vs. W-2s: Which Should I Hire? ›

In most cases, 1099s are cheaper to hire than W-2s. You don't have to pay 1099s health insurance, life insurance, bonuses, stock options, or 401(k) contributions. You also don't have to pay for their training, their downtime, or their worker's compensation.

Is it better to hire W-2 or 1099? ›

1099 workers are responsible for 100% of Medicare and Social Security taxes and generally pay them quarterly while W-2 employees are only responsible for 50% of those taxes and have them taken out of their paychecks automatically. Both types of workers pay an income tax rate based on their tax bracket.

What is the downside of being a 1099 employee? ›

Some of the disadvantages of being a 1099 employee include you must fund 100% of your Medicare and Social Security taxes, health insurance, retirement savings, as well as any tools and equipment needed for your profession.

Why do companies hire 1099s? ›

Reduced business costs are one of the main reasons many employers are switching to 1099 contractors.

Is being a 1099 employee worth it? ›

1099: Being a 1099 employee offers more flexibility and control over your work, the possibility of higher earnings, and potential tax deductions for business expenses. However, you'll be responsible for managing your own taxes, won't have access to employee benefits, and may experience income volatility.

Why is a 1099 better than a W-2? ›

It is more advantageous for a company to pay you as a 1099 contractor as they save paying employer portion of payroll taxes. Also you will not count as an employee for the Affordable Care Act (which impacts companies with over 50 employees).

What is the 1099 hourly rate? ›

How much does a 1099 Contractor make in California? As of Apr 29, 2024, the average hourly pay for a 1099 Contractor in California is $33.90 an hour.

Do you pay more taxes as a 1099 employee? ›

While being an independent contractor means you have to pay more in self-employment taxes, there is an upside: You can take business deductions. These business deductions reduce the amount of profit you pay income taxes on. You'll report these deductions along with your income on Schedule C.

Do 1099 mess up taxes? ›

As a 1099 contractor, you pay more taxes than a full-time employee because you pay the full 15.3% in FICA taxes, which employers normally split with employees. A W-2 employee has half of this 15.3% share contributed by the employer.

Is it better to hire an employee or independent contractor? ›

Engaging contractors is a cost-effective and efficient option for hiring expert talent for short-term projects. However, by hiring employees, organizations build a connected company culture, generating ongoing business contributions that often outweigh the higher associated costs.

What is the difference between a 1099 hourly and a W-2 hourly employee? ›

1099 contractors typically set their own schedules, or at the least, agree to a schedule in conjunction with their employer or client. Meanwhile, a form W-2 employee is regularly paid employee, who often receives healthcare and other benefits.

Why do companies like to hire independent contractors? ›

Working with ICs allows employers greater leeway in hiring and letting go of workers, which can be especially advantageous for employers with fluctuating workloads. You can hire an IC for a specific task or project, knowing that the worker will be gone when the job is finished.

What does it mean to be hired as a 1099 employee? ›

What is a 1099 employee? A 1099 worker is a freelancer, independent contractor, or other self-employed worker that completes particular jobs or assignments; they are not employees of the company. Since they're not deemed employees, you don't pay them wages or a salary.

Top Articles
Latest Posts
Article information

Author: Aracelis Kilback

Last Updated:

Views: 6073

Rating: 4.3 / 5 (64 voted)

Reviews: 87% of readers found this page helpful

Author information

Name: Aracelis Kilback

Birthday: 1994-11-22

Address: Apt. 895 30151 Green Plain, Lake Mariela, RI 98141

Phone: +5992291857476

Job: Legal Officer

Hobby: LARPing, role-playing games, Slacklining, Reading, Inline skating, Brazilian jiu-jitsu, Dance

Introduction: My name is Aracelis Kilback, I am a nice, gentle, agreeable, joyous, attractive, combative, gifted person who loves writing and wants to share my knowledge and understanding with you.