When hiring new employees for your team, it can be difficult to figure out the difference between independent contractors and employees––when to use 1099s and when to use W4s. Though it’s confusing and kind of overwhelming, you must have a basic understanding of how to classify your employees, even if you utilize the assistance of an accountant or payroll service to do the bulk of the work for you.
Whether your workers are full-time employees or independent contractors affects how both you and they are taxed. In this blog, we’re going to look at a few things to keep in mind when choosing your payroll structure.
1. 1099 Workers Owe More Come Tax Season
The 1099 employment option often tempts many employees because they’re told they will receive a bigger check than if they chose the W4. The note of higher pay is enticing upfront, but they’re unaware of how their employment status will work long-term.
While this is true––workers will make more––independent contractors will owe higher taxes than employees. This is because not only will income tax be taken out, but self-employment tax as well. Also, 1099 employees are expected to pay twice as much for social security and Medicare taxes.
2. W4 Workers Work at a Higher Rate
Hiring employees on a W4 means including them in your payroll, paying all taxes, health insurance, and contributing to unemployment insurance on their behalf. All things considered, hiring a W4 employee comes at a high rate.
Keep in mind that a W4 worker’s termination process is a lot more difficult than that of an independent contractor. This is why it’s imperative to conduct regular performance reviews and note any salaried employees’ behavioral issues.
3. Contractors Receive Fewer Benefits
In addition to owing more money during tax season, 1099s or contactors will never reap the same benefits that salaried employees can take advantage of. These benefits include vacation hours, health and dental insurance, worker’s comp, retirement, sick days, pension, and unemployment benefits. Nor are 1099 workers eligible for overtime pay.
4. W4 Workers Put Out Quality Work
As opposed to their freelance counterpart, W4 workers are more likely to feel secure in their employment. This security often translates to more loyalty and accountability for work and its quality.
As an employer, you can attract a larger audience of talented people if you hire them as salaried employees. This is because highly skilled professionals generally gravitate towards jobs that afford them paid vacations, social stability, corporate perks, and incentives that an employer provides, such as medical insurance and sick days.
5. Hiring 1099 Workers Saves Money
Compared to hiring high-rate salaried employees, independent contractors save on costs. Not only do you save during tax season, but you also save on health insurance, retirement plans, and social contribution. Another pro is you can pay your 1099 workers on an ad-hoc basis for the projects they’ve completed.
Though this list isn’t exhaustive, it’s a great start to use when planning your next company hire. For more small business advice, check out our Small Business Blog Archives.