MBO Partners discusses the key advantages and disadvantages of engaging with an employee or independent contractor.
Correctly classifying soon-to-be-acquired talent as either traditional employees (i.e., recipients of a W-2 Wage and Tax Statement) or independent contractors (i.e., recipients of 1099 Miscellaneous Income tax forms) can have long term, far-reaching implications, particularly if completed improperly. It is incumbent upon the hiring business to fully understand the advantages, disadvantages, and legal implications of this important step in the talent procurement process.
Though their hourly calculated reimbursement may be significantly higher than those of traditional employees, at the end of the day, independent contractors often actually result in less overall spend. Since independent contractors are responsible for paying the employer and employee portion of FICA earned income taxes, you are not responsible for this costly and administratively time-consuming expense. For a traditional employee, the employer is responsible for paying half of the 12.4% Social Security tax (up to $117,000 in 2014) and half of the 2.9% Medicare tax, which has no upper limit.
In addition to the initial tax savings involved, independent contractors are typically ineligible for employee benefits such as health and worker’s compensation insurance, further decreasing the overall spend. As of December 2013, the Department of Labor estimates that benefits are valued, on average, at nearly 31% of salary. Also, as the ACA employer mandate begins to take effect, the number of employees who should be eligible for partially employer-sponsored health insurance coverage will grow considerably.
Flexibility can be a strong determining factor in choosing whether to engage talent as a 1099 vs W2. If your business has seasonal highs or lows, or you require specialized talent for a specific project, you may want the staffing flexibility of 1099 workers. The decision should ultimately hinge on the particular demands of your specific project and business model. In most states (not including Montana), at-will policies allow employers (and employees) to terminate the working relationship at any time for any reason, but an employer’s ability to terminate a working relationship with 1099 worker may be governed by your contract with the independent contractor.
Traditional employees offer the flexibility of extensive employer control over how, when, and which projects are completed at any given time. With a W-2 employee, businesses can assign more hours, more personnel, or both to a project in the timeframe of their choice. One benefit of an employee is you can direct and control their day-to-day work, and thus the productivity and use of their time.
With a 1099 worker, on the other hand, employer control over when and how a project is completed must, by definition, remain quite limited. An independent contractor is responsible for how their work is done without direction or control. Using independent contractors on a project, however, offers the flexibility of being able to acquire talent for a circumscribed period of time without an ongoing commitment, financial or otherwise.
Read the full story at 1099 vs W2: Pros and Cons | MBO Partners | MBO Partners