Is a 1099 or a W-2 Employee Better for My Business?

When looking to fill a position, you may wonder whether hiring a 1099 employee makes more sense than hiring a W-2 employee. How can you know which type of employee is best for your business?

Understand the difference between the two employee types

A 1099 employee is a contract or freelance employee who works on an as-needed or project basis. 1099 employees are generally not required to go into an office and can complete the assigned work when it suits their schedules.

On the other hand, a W-2 employee has an ongoing employment contract and usually works at a specific location. Additionally, with a W-2 employee, you'll have more control over where, when and how the employee does the assigned work.

Understand the differences in how to pay each type of employee

1099 employees are usually paid an hourly or per-project rate, and their work hours will likely vary each week. And, most notably, you aren't required to provide 1099 employees with benefits, like health insurance or worker's compensation. Conversely, W-2 employees are either salaried or paid by the hour, and are eligible for Medicare, unemployment insurance, Social Security and worker's compensation.

Hiring 1099 employees

Advantages include:

  • In addition to gaining expertise, you'll typically save money on wages, taxes, insurance and other benefit costs.
  • You're less likely to be sued because there are different labor laws when working with 1099 employees compared with hiring full-time employees.
  • You can use a 1099 employee only when needed.
  • 1099 employees are usually easier to manage because they commonly run their own businesses.

What's the downside?

You may have to pay a higher hourly rate for their work, you may not be a priority (as they may have multiple clients) and you may not get the same feeling of team cohesiveness that a full-time employee brings to the table.

Hiring W-2 employees

Advantages include:

  • You'll create more consistency and comradery among your team, which ultimately supports your bottom line.
  • You can hold them accountable to maintain and contribute to your culture and vision.
  • They're on hand to cover when there may be a shortage of help—or if you need something done outside of their normal duties.

What's the downside?

Hiring W-2 employees may include higher costs to your business because you'll need to cover taxes, payroll, health insurance and unemployment. If you're unhappy with a W-2 employee's work, you must go through the proper channels to fire them, whereas you can simply stop requesting work from a 1099 employee. W-2 employees also need to be trained, groomed and managed, which may take more time.

Which type of employee is best for your business?

It all depends on what you need. If you find you need regular assistance, it may be time to hire a full-time (W-2) employee. But if you need assistance with taxes or marketing and you can't afford another person on staff, you may want to consider hiring a freelance or contract employee (1099).

Whichever choice you make, hiring a highly qualified employee that best suits your needs can make the difference in moving your company forward in a productive way.

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The information provided is not intended to be legal, tax, or financial advice. BB&T hopes you find this information useful but we cannot guarantee that it is accurate, up to date, or appropriate for your situation. You should consult with a qualified attorney or financial advisor to understand how the law applies to your particular circumstances or for financial information specific to your personal or business situation.

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