You started your business, got a couple clients under your belt and now you need some help. Congratulations! This is a huge step in your growing business, and can be a daunting one at that! However, you have another major decision to make before you can even start looking for that much needed help. Should you hire as a W2 employee or as a 1099 Contractor? Let’s take a look at some of the key differences between the two, so you can make an informed decision.
A W-2 employee is your most common type of employee. When you think of your neighborhood grocery store, bank, movie theater, etc., all of those workers are most likely set up as a W-2 employee. This setup is also the most regulated type of employment at the Federal, State, and even local levels. All of these regulations are put into place to protect both the employer and the individual employees. You, as the employer, are responsible for various employment taxes including FUTA, SUTA, and Medicare as well as submitting various quarterly tax payments. There are many steps you have to complete before getting your first W-2 employee onboard, here are a few of the main ones. *Note these are not in any particular order, as long as you get them done before your first employee is hired.*
1: Register with the IRS to get your federal employer identification Number (FEIN)
2: You will also need your employees to fill out a W-4 (Federal Tax Withholding)
3: Register with your State Labor Department
4: You will need to have your employees fill out a State Tax Withholding form
5: New hire reporting by state and File I-9 Forms
6: Get Workers Comp Insurance
7: Set up a way to properly pay employees, while tracking employment taxes
Definitely the easier option in terms of paperwork, and a great option for smaller sized operations. If you’re looking for a virtual assistant, or just an extra pair of hands for some service work, this is definitely the go to option.
If you ever heard the term “Freelance” work, the freelancers are working as a 1099 Contractor. This is great for one off projects, such as if you need an extra pair of hands to complete a bigger landscaping project. If you’re looking to hire a Virtual assistant or a marketer, or even a bookkeeper (like Anchor Solutions) to work on a recurring basis, a 1099 contract can be great for you as well.
When hiring a 1099 contractor, no employer taxes are needed, no SUTA no FUTA, you simply pay them the agreed amount for their service. With that said, as a 1099 contractor no taxes get pulled out of the paycheck, leaving it up to the contractor to be responsible with their taxable income. However, you as the hiring entity are responsible for providing the contractor with a 1099-MISC form. The 1099MISC looks similar to a standard W-2 form, outlining any amounts paid out to the contractor within the tax year. This is required so that the contractor(s) you hire can properly prove their income for that taxable year.
Both options have their merit, and one may work better than the other, dependent on your situation and needs. In today’s post pandemic world more and more employers are going virtual. We believe this is going to pave the way for an uprise in 1099 contractors. We are excited to see what direction employers take in this changing work environment.
If you need any further assistance in hiring your first employee, or in deciding to go 1099 vs W-2 send us an email, we would be happy to help you out!