Not sure about hiring a full-time employee (W-2) or an independent contractor (1099-NEC)? This blog will help you make an informed decision.
As your business grows, so does the volume of your work. The need for having an extra set of hands to help you with your growing workload pushes you to employ more resources and facilitate smoother operations. After all, having additional resources is a great way of handling work.
You can evenly distribute the work to a number of resources, create certain positions that can micro-manage the tasks for you, and supervise the overall workflow. Eventually, this process helps you reach your goals (or not).
If you managed to reach your business goals, you must be doing something right (but there are ways to make it even better), and if things didn’t work out, this blog might help you understand where you may have gone wrong and how to get things right this time around (in terms of hiring the right kind of resources for optimal productivity and tax compliance).
While hiring and getting the extra help is always great, it’s important to weigh in all the options to hire the right type of resource. We are not talking about talent acquisition here. We are talking about resource acquisition and how it affects the way you report taxes.
- See the definition of an employee from the IRS here.
- See the definition of an independent contractor from the IRS here.
What kind of resources would best work with your enterprise? Does your company need someone to work for a limited period? Or do you need someone who can work with your company in the long term? Does your company have the financial resources to afford a long-term employee?
You will be able to address all such questions by understanding the very subject of this blog – hiring a contractor versus an employee.
Let’s find out.
Hiring a Contractor – 1099-NEC
More prominently known as “1099 employee”, an independent contractor is a self-employed individual who offers the services that you require. You hire them for a pre-defined term or as long as you need their services. Businesses are required to report any payments made to independent contractors for their services on Form 1099-NEC.
For example, if you have hired a creative designer for 2 months to design your brand logo and other visual content, it means that you have hired an independent contractor. Whatever money that you might have paid to them for doing that specific work is considered as “nonemployee compensation” because you have compensated a ‘nonemployee worker’.
Businesses do not have to provide any special benefits to independent contractors, such as medical insurance, bonuses, unemployment relief, retirement benefits, and other employee benefits. This helps you cut down on costs (and even taxes).
Hiring a Professional/Individual as an Employee – W-2
Businesses hire qualified professionals to utilize their services full time. Unlike an independent contractor, who works as a freelancer, an employee works for your company and your company alone, for as long as you can afford them (or until they find a better offer elsewhere).
If you are hiring a qualified professional, you are required to provide certain employee benefits, such as health insurance, bonuses, unemployment relief, retirement benefits, and more.
You must report any employee compensations you have made to an employee, such as salaries, wages, overtime compensations, workers’ compensations, and more, on Form W-2.
For example, if you have hired a woman named Kiara as a Creative Director for your company, then you are required to report whatever compensations that you are making to Kiara as “employee compensations” in Form W-2.
It is extremely crucial to understand the difference between these two resource types.
So, we have created a simple chart, which will help you understand what differentiates an independent contractor from an employee.
|Businesses pay remuneration, wages, salaries, bonuses, and other kinds of regularized (fixed and timely) compensations to employees||Businesses pay fees, service charges, and other compensations to independent contractors depending on the agreed terms|
|Needs to be reported on Form W-2||Needs to be reported on Form 1099-NEC|
|Businesses are required to provide employee benefits to employees||Businesses are not required to provide any employee benefits to independent contractors|
|An employee works for the employer only||An independent contractor works for several clients|
|Tools, material, and equipment to work are to be provided by the employer to the employee||Independent contractors use their own resources, tools, and materials to work|
|The employer decides the time and location of work for the employee||A contractor gets to decide their time and location of work|
|An employee works under the control of the employer||A contractor is independent and is not required to obey the obligations of the hirer|
|An employer cannot delegate their work to outsiders or others||An independent contractor is free to delegate their work to others|
|The employer provides training to an employee||An independent contractor does not require training|
|An employer and employee are bound by an employer-employee relationship||An independent contractor and hirer are not bound by any relationship|
Weigh In On Your Options – When Hiring an Independent Contractor
While it might seem tempting to hire an independent contractor for all the cost and tax benefits, there are some challenges.
- It would be very hard to chase an independent contractor if you have time-bound projects.
- The deadlines for a project are your deadlines, not your contractor’s deadlines.
- Independent contractors are not dedicated to just your project. They have multiple projects and clients to work with.
- Independent contractors are free to work from anywhere, which might be challenging if your operational business location is different or far away from theirs.
- Independent contractors are free to delegate their work to others, which means that you do not get to see or meet the individuals that are taking up your projects.
- If your projects are information-sensitive, it’s best to steer clear of independent contractors. Alternatively, you can make your contractors sign a Non-Disclosure Agreement (NDA) to ensure privacy.
When Hiring a Professional/Individual as an Employee
The most important thing to remember when hiring someone as your employee is that you cannot, no matter what, misclassify your employees as independent contractors to cut down on costs and taxes. Several businesses in the past have paid the price for misclassifying their employees as independent contractors.
The IRS heavily penalizes businesses that intentionally misclassify their employees as independent contractors. Learn more about penalties and punishments here.
Even though hiring someone as your employee may seem like the right option at the beginning, there are certain constraints, such as inadequate funds to compensate employees in the long run, complex tax procedures, internal corporate issues, and more, which push businesses to take these wrongful, extreme, and deliberate steps.
Do not be in a rush to hire more people to be taken more seriously. You are all about business whether others take you seriously or not.
Having your own dedicated resources, however, has its benefits.
- Your employees abide by your company’s rules and regulations.
- Your employees are dedicated to your company alone.
- You can monitor your employee activity and productivity.
- You get to decide if you want to keep or let go of the inefficient resources.
- You do not have to chase your employees to meet certain deadlines.
- Your employed resources are focused on specific projects and goals, which helps boost organizational productivity.
Remember that no business empires were built in a day. If your business is not in a position (yet) to hire a full-time employee, then you probably should not hire one. Don’t stretch yourself thin. Instead, try to find budget-friendly freelancers (there are thousands of them out there!) and work around some terms and conditions, which will benefit both parties.
The important thing to remember, whether you’re hiring a contractor or an employee is to hire someone, anyone who adds value to what you do and carries a healthy attitude towards work.
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