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1099 vs W2 Pros and Cons Employers Should Consider

June 3, 2024 | Staffing Blog

As workforce needs continue to change, it can be increasingly challenging for employers to know whether to build their roster around 1099 contract workers, W-2 employees, or a combination of talent.

Allegiance Staffing knows that the choice might not always be clear when contracting with independent workers or hiring an employee. Fortunately, our experienced team can help guide you through complicated issues.

Let’s review some 1099 vs. W-2 pros and cons that could affect your company. We’ll help you formulate the ideal hiring approach that aligns with key aspects of the business.

Pros and Cons: 1099 Contractor vs. W-2 Employee

There are key differences between contract 1099 employees and W-2 employees. Exploring these differences and understanding the potential implications for employers is critical when choosing a hiring model. (It’s also important to know how a subsection of contract resources, gig staffing, can affect your company.)

We’ll cover some key considerations that HR managers and employers should evaluate when creating a workforce to support the company’s business objectives.

Tax Implications

The tax implications of 1099 vs. W-2 are very different. We recommend consulting with your company’s tax department or advisor to help determine which classification best suits your situation.

  • 1099 Contractors: Individuals classified as 1099 independent contractors are considered self-employed. This status means contractors are responsible for handling their own taxes, including filing IRS forms and paying self-employment taxes. Your company provides each contractor with a 1099-MISC tax form. This setup could reduce administrative burden and tax obligations for your company.
  • W-2 Employees: Employers must withhold taxes from each individual who qualifies as an employee. This includes federal, state, Medicare, and Social Security taxes. In this case, the burden of compliance, record-keeping, and issuing W-2 Wage and Tax Statements rests largely on the employer.

Employment Benefits

A key consideration for companies is whether you wish to pay benefits. Because contractors usually come on for a project or at various intervals throughout the year when help is needed, they are not considered full-time employees. Traditional employees, on the other hand, retain more predictable schedules and are entitled to benefits.

  • 1099 Workers: Typically, 1099 contractors do not receive the same benefits as W-2 employees (e.g. health insurance, retirement plans, and paid time off). The contractor is responsible for securing benefits, which frees your company from this responsibility. This arrangement could be financially beneficial. However, you could run into legal issues if your company attempts to stretch the limits of contract work to avoid paying benefits.
  • W-2 Employees: Most companies offer W-2 employees a comprehensive benefits package – including health and dental insurance, retirement contributions, and paid time off – to reward employees and support retention. However, offering employee benefits and covering related expenses such as worker compensation can be costly.

What Are the Risks of Each Employment Type?

Now that we’ve outlined some pros and cons of building your roster around W-2 or 1099 workers, it’s important to understand the risks. Weighing the risks and rewards of each worker arrangement can lead to a more productive workforce.

1099 Contractors: Risks for Employers

Misclassifying employees as 1099 contractors when they should be W-2 employees can create legal consequences. Some ramifications include potential fines and penalties if the IRS determines your company skirted the requirements.

Additionally, some businesses may face challenges in retaining top talent, as many workers seek the stability and benefits associated with traditional employment.

W-2 Employees: Risks for Employers

Companies that employ W-2 workers may face higher labor costs due to salaries, benefits, payroll taxes, unemployment insurance, and potential liability issues. Compliance with labor laws and regulations is critical to avoiding legal consequences.

The Pitfalls of Gig Staffing

Your company may also consider gig staffing to fill micro workforce needs or on-demand situations. While this type of relationship may create flexibility for employers, it also comes with its own set of challenges:

  • Workforce Volatility: The lack of consistent access to workers could make it difficult to fill critical roles when production ramps up or an immediate need arises.
  • Lack of formal relationship: The IRS limits the amount of control an employer can have over contractors, including gig workers. Because the arrangement with a gig worker is highly informal, asking an individual to do more than asked could result in a run-in with the IRS.

Work With Allegiance to Identify the Right Labor Solution

Deciding how to balance the needs of 1099 vs. W-2 workers is a challenging decision. For example, hiring contractors may create difficulty with talent retention in the long run. You may lose out on certain talent who prefer the stability and consistency created by W-2 employment.

Employers must also navigate the legal complexities to avoid misclassification and potential repercussions. Also, as gig staffing becomes more prevalent, organizations must carefully consider the long-term impact of their employment choices.

At Allegiance Staffing, we know navigating issues around contract work and W-2 employment can be difficult for HR teams. Our goal is to identify labor solutions for employers that need to build productive workforces.

1099 vs W2 Pros and Cons: Turn Workforce Challenges into Strengths

Does your company need contract or W-2 workers for manufacturing, warehouse, hospitality, or other crucial industries? We have you covered. Our experienced team vets our pool of applicants, so you can spend less time searching for the right workers and more time creating an effective workforce.

When you partner with Allegiance, we help you maximize profits while minimizing your spending by offering a full range of staffing services. Among our benefits are turnover analysis, safety reviews, recruiting and placement, and human resource consulting.

On top of these advantages, we make sure you save time and money by placing qualified candidates in your workforce without the need for many rounds of tedious interviews.

Read more about our labor solutions in the Employer FAQs on our website.

Get in touch with our knowledgeable support team to discuss your roster. Our professional staff is ready to talk more about the 1099 vs. W-2 pros and cons. We can also discuss other labor issues that matter to you in today’s changing business environment.