Employment Dilemma: Choosing Between 1099 Or W-2

Independent contractors, or 1099 employees, are self-employed people who work with clients typically on a project basis and are not on a company’s payroll. They usually work part-time, for a limited period of time. 

Unlike W-2 employees, contractors don’t receive employee benefits or employer tax contributions. They pay self-employment taxes, use their own tools and workspace, and manage their own work schedule.

Companies hire independent contractors when they have a fluctuating workload or can’t afford to hire full-time employees just yet. And independent contractors appreciate the flexibility that comes with that type of relationship.

However, sometimes it’s better to be or hire an employee instead. In this article, we’ll walk you through all the pros and cons of being and hiring 1099 workers.

Pros of working as a 1099 contractor

Independent contractors, sometimes called freelancers or 1099 “employees” because of the IRS form they fill out, enjoy far more flexibility than most employees.

You have more control over how you work

It’s in the name–as an independent contractor, you manage your own schedule and work arrangement. You don’t have a company policy or specific working hours, location, or mandatory training. Independent contractors are generally responsible for providing deliverables according to the independent contractor agreements’ stated scope of work and timeline. Beyond that, a freelancer is an independent worker.

You have higher earning potential

In 2019, 91% of independent contractors confirmed in a survey that they earned more money doing contract work than when they were employees on a company’s payroll. Employers are often willing to pay higher rates for contractors since they don’t cover benefits. A single annual salary doesn’t limit contractors–you can work with as many clients as they want.

Independent contractors also sign and re-sign contracts more frequently, giving you more chances to negotiate higher rates of pay.

You have more control over your work-life balance

When you’re in charge of your own work schedule, you have more flexibility to take a day off and set your working hours. You can work from any location and at any time, which means you can easily organize your days to leave room for family time, traveling, hobbies, and more. Also, you have the liberty of taking large chunks of time off between projects without needing approval or thinking about PTO.

You can test an employer before committing to them

If your goal is to get employed, you have a chance to test a company and determine whether you’re a good fit before committing to them full time. After you’ve worked together on a few short-term projects, both you and the client can discuss whether they should convert you to a full-time employee.

You can work on diverse projects

When you work for a single employer, they decide on your work tasks and you may grow to find the business and industry a bit repetitive. When you’re a contractor, you can work with multiple clients of different sizes and different industries, which makes your job more dynamic and interesting.

Cons of working as 1099 contractor

Many freelancers enjoy the lifestyle but 62% wish they were employed full time, according to McKinsey. 

You manage and pay your own taxes

Independent contractors need to pay a 15.3% self-employment tax rate (for medicare and social security taxes) and income tax on their total taxable income. They are technically self-employed, or even business owners depending on how they became an independent contractor. When you’re an employee, your employer covers a portion of these taxes and offers automatic tax withholding via payroll taxes, so you don’t have to worry as much about taxes throughout the year–until tax season, that is.

However, independent contractors can write off a wider array of business expenses because they are self-employed individuals. That means independent contractors may be eligible to get money back on your tax returns. Check out our guide on tax deductions for independent contractors for more information.

You pay for your own tools

Employers provide their teams with tools and equipment to do their job. As a contractor, you invest in your own toolkit, pay for whatever software licenses you need, and buy any equipment you need to attract clients and provide deliverables.

You have no company benefits

As an independent contractor, you can enjoy employee benefits companies offer to their full-time employees, like paid time off, sick leave, overtime pay, maternity leave, wellness programs, healthcare, workers’ compensation, vision and dental insurance, retirement plans, and more.

You may feel isolated

Being your own boss may start to feel lonely after a while. When you work in a company, you usually have a team and develop a sense of belonging and (hopefully) an appealing company culture. When you’re a contractor, and especially if you work from home all the time, you may start to miss daily water cooler conversations and working among people.

You invest in your skills on your own

Many companies offer learning and development programs or even career coaching as employee benefits, as they are critical for employee retention and engagement. But, when you’re a contractor, you need to pay for your own courses and webinars and polish your skills to keep up with the changes in your industry.

Pros of hiring a 1099 contractor

Companies hire independent contractors because they are less expensive than full-time employees and provide more targeted, expert services for short-term projects.

You can reduce your employer costs

If you want to hire an employee and give them an annual salary of $80,000, your total employer costs may be around $90,100. That’s because you must provide employee benefits, cover unemployment insurance, pay FICA taxes (social security and medicare taxes) for each full-time employee. Paying a contractor the equivalent of a full-time salary is a huge saving for you, especially if you operate with multiple contract workers.

You don't need to onboard and train contractors

Independent contractors bring specialized knowledge to the table. You don’t need to provide them with training or take them through an onboarding process because they already know how to complete whatever project you hired them to complete.

You're not exposed to wrongful termination lawsuits

Unlike employees, independent contractors can’t sue you for wrongful termination. Of course, you need to ensure they’re properly classified and that you don’t breach the agreement you may have signed, but when you want to terminate your collaboration, you can simply notify the contractor of that in a face-to-face conversation or via email.

You can hire temporary workers based on your workload

Hiring independent contractors gives you more flexibility when you have an unpredictable and fluctuating workload. There may be specific months or seasons when you’re busier than usual and may need help, so it’s more affordable and quicker to hire contract workers than employees.

You can access global talent more easily

Hiring independent contractors across the globe is easier than hiring employees. You don’t need to set up a foreign subsidiary or use EOR services to hire contractors in countries where this form of work is regulated by law and the contractors are registered taxpayers. They can also work with you through their registered business entity.

Cons of hiring a 1099 contractor

Since 1099 contractors are usually short-term employees, they don’t offer the same form of long-term collaboration a permanent employee would.

You may not own the copyright for the contractor's work

Intellectual property laws vary by country. In most cases, the copyright transfer regulations aren’t as strict as with employees. That means your contractor will still have the right to the product of their work, while employees typically sign contracts that transfers ownership to the employer.

You risk worker misclassification issues

Hiring independent contractors is a sensitive issue, especially if you don’t have a legal team to draft your contracts and ensure full compliance. When working with independent contractors, you need to make sure they don’t resemble an employee, which you can do by going through the available tests that help you determine your worker’s status, such as the IRS 20-Factor test.

Read more about independent contractor misclassification in our guide.

You have less control over the contractor's work

Contractors enjoy autonomy when working, so it’s challenging to supervise their work. They don’t work at your premises and may not be online during the same working hours as you. You need to rely on asynchronous communication and base your business relationship on trust.

You don't have the contractor's full availability

Some independent contractors may accept recurring assignments from you, but others will want to move on to other projects. That can be a challenge if you find a contractor who understands your business perfectly and you’d like to continue working with them, but they’re busy with other projects when you need them.

You can't expect full loyalty from contractors

Employees can be excellent brand ambassadors if you provide them with an outstanding employee experience, but that’s not the case with independent contractors. They may be satisfied with the collaboration, but they won’t be as invested and loyal as full-time employees.

When to work as a W-2 employee vs. 1099 contractor

In some situations, it may make more sense to look for a full-time job rather than become a contractor, such as when:

• You want to enjoy the full-time employment benefits, such as health insurance or PTO
• You want to focus on learning and polishing your skills
• You need to develop expertise before being able to attract freelance clients
• You don’t want to promote your services and chase new clients all the time
• You plan to start a family and want a more stable work situation

When to hire a W-2 employee vs. 1099 contractor

Hiring contractors has its perks, but sometimes your company can benefit from having W-2 workers instead, such as when:

• You want to have a full-time generalist on your team
• You want to build a stable team that will grow alongside your business and share your values
• Your budget allows you to hire full-time employees and cover the total employer expenses
• You want the worker to focus solely on your business, without additional projects

Hire your global team compliantly with Deel

Finding and hiring the right people can be challenging whether you have a small business or a large enterprise and whether you’re looking for independent contractors or full-time employees. It’s just as time-consuming to find the right employer and commit yourself to do great work.

Deel lets you hire both types of workers, anywhere in the world, within minutes. Plus, you can rest assured legal experts vet your contracts to be completely compliant, so your new hires are set up to work correctly in no time.

Want to learn how it all works? Book a demo today to find out.