What are the benefits and trade-offs of having 1099 employees versus W2 employees? | Entrepreneur (2024)

FAQs

What are the benefits and trade-offs of having 1099 employees versus W2 employees? | Entrepreneur? ›

1099 workers usually have their own insurance, aren't eligible for workers compensation coverage and can't make most kinds of wrongful termination claims. More affordable – 1099 workers can cost your companies a lot less money than W-2 employees. No benefits, minimum wage, and overtime are required.

As a 1099 contractor, you receive more tax deductions like business mileage, meal deductions, home office expenses, and work phone and internet costs, as well as other business expenses that can lower your taxable income. Therefore, contractors might end up paying fewer taxes than a traditional employee would.

You might earn more as an independent contractor, and the tax benefits can include deducting your business expenses. The drawbacks to being an independent contractor include more responsibility. Independent contractors must fund 100% of their Medicare and Social Security taxes, health insurance, and retirement.

However, W-2 employment also has its downsides. Those include: Higher costs – Employers are responsible for covering payroll taxes, workers' compensation, unemployment insurance, and providing benefits. These all significantly increase labor costs.

Independent contractors can make use of tax deductions that regular employees aren't entitled to. These deductions let you claim business expenses such as equipment and business travel. Deductions offset your business income, allowing you to reduce the income tax you pay and keep more of your hard-earned money.

W-2s: a pros and cons summary. Pros: 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.

Benefits for a W-2 Employee Compared to a 1099 Worker

W-2 employees are afforded protections under the law, such as minimum wage, overtime, and family and medical leave. They're also entitled to participate in your benefits like health and dental insurance, which are often better than what they can afford on their own.

One of the greatest perks of working as a 1099 worker is the independence it provides. As a freelancer, your client has no authority or control over you, your projects, or your working hours. Plus, you get to be in charge of the project and decide the service rates, where you work, and subcontracting schemes.

Independent contractors are not protected by Equal Employment Opportunity laws, requirements to provide minimum wages and overtime pay, workers' compensation laws, or unemployment compensation laws, among other regulations. Further, independent contractors are not entitled to many benefits offered by employers.

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 do companies prefer W-2? ›

When you hire a W2 employee, you are locking a person into a contract that improves their commitment to your organization, offers more continuity in employment, and allows for greater control over working hours and conditions.

An employer will issue a Form W-2 to you if you are an employee. You'll receive something different—Form 1099—if you're an independent contractor.

Earn a Wage as a W-2 Employee

This is a good way to have a predictable income for your personal finances. As an LLC owner, this is also a good way to get paid because you will only have to pay self-employment taxes on the salary you have designated for yourself.

You can avoid penalties if you make quarterly payments of at least 90% of the amount owed for the current tax year. Or you can pay 100% of the taxes you paid the previous year — whichever is smaller. When you file your annual tax return, if you've paid too much estimated tax, you'll get a refund.

1099 contractors do end up paying more in taxes than a W-2 employee but there are ways to lower them through credits, business expenses, and putting money into retirement accounts.

1099 workers

These workers are considered “self-employed,” so they pay their own taxes and provide their own benefits. You don't need to withhold or file payroll taxes on their behalf or offer 1099 workers the same benefits you offer W-2 employees.