More than ever, employers are hiring short- and long-term contractors to product high-quality work in almost every field. The employee vs contractor classification, however, is about more than the number of hours a person works; it dictates the type of form you’ll need to complete upon hiring. Each employer has a different reason for making a choice in the W-2 Employee vs 1099 Contractor debate, but all businesses are subject to the same IRS-imposed rules when it comes to making this decision.
First, your business will need to determine whether it has the characteristics necessary to hire an employee or contractor. If you control the exact schedule, the nature of the work, and the necessary supplies, the worker is an employee and necessitates a W-2. If the employer does not control the schedule or exact nature of the work, a 1099 form will fit the bill. Worker classifications can get more complicated, so we recommend checking out our guide.
How the W-2 Employee vs 1099 Contractor Classification Impacts Pay
Deciding between a W-2 employee vs 1099 contractor to cut costs is a popular strategy for emerging small businesses. Businesses with few employees and small profit margins may not be able to provide employee benefits beyond certain federal and state-mandated insurance programs. Though payroll taxes remain constant, 1099 contractors will pay both the employee and employer portions. This results in an hourly rate difference of about 7.65%. Calculating the exact difference is often complicated, but this rule-of-thumb can prove essential in making your initial decision.
In most cases, it is easier to estimate a 1099 contractor’s rate. A W-2 hourly rate will include everything from the employee’s annual salary to their benefits package. Contractor requirements are far more cut-and-dry, which may prove especially helpful for small businesses.
Filing the Necessary Paperwork
Whether you choose a W-2 Employee or a 1099 Contractor, you will need to complete the relevant paperwork. Employers and businesses should also retain these essential forms for the duration employee’s tenure. Though your decision may have been relatively simple, this process may be the one to cause a headache.
This is where Advanced Micro Solutions can help. From the outset, we have made a point to ensure our software can handle both 1099 contractors and W-2 employee payroll. We provide digital facsimiles of both W-2 and 1099 forms for easy completion and data input. Our software can then help store these forms for easy access, and you’ll almost never have to enter the same data twice. Finding a user-friendly payroll and accounting software is an essential part of any small business’s journey, and we’re here to make it easier.
If you’re unsure if AMS can handle your W-2 employees or 1099 contractors, we encourage you to take our 1099 Software for a test drive. Our products are available in the form of free, downloadable demos for you to browse at your leisure. Rather than gambling on an accounting product, we want you to fully understand the scope and breadth of our software tools. If you have any questions, please contact our Sales and Information team at 800-536-1099. If you’re choosing a W-2 employee vs 1099 contractor, we have the tools to handle any option.
IRS Rules and Guidance
- Read the IRS rules that guide 1099 vs. W-2 worker classification here.
- You can also make a formal determination by filing Form SS-8.