Small business owners need to hire temporary workers for a variety of reasons — seasonality, replacing employees on leave, and finishing objectives before the end of the year. But with the rise of freelance workers and the popularity of independent contractors, deciding what kind of worker to hire can be less clear cut. The problem is that worker classification is serious business. Misclassifying an employee can mean thousands of dollars in fines from the Internal Revenue Service. So getting this right is crucial to avoid potential lawsuits and hefty penalties. So what’s the difference between the two? While it’s not necessarily a walk in the park, it’s possible to define. And once you’ve done that, it’s possible to figure out who you need to hire and when.
Distinguishing an independent contractor from a part-time W-2 employee isn't easy. After all, both works for short periods of time and have flexible schedules. Both may be brought on for seasonal work or a special project, and both can be paid by the hour. And to be honest, a part-time employee and 1099 worker can both have more than one client. So which worker do you really need? Well, it depends on many factors, including your budget and needs. But understanding the difference between an independent contractor and a W-2 employee, beyond the different filing forms, is a good way to determine which worker would benefit your business.
First off, a 1099 worker is a business owner. They pay their own taxes, may manage their own employees, and are highly specialized. As a result, contractors might charge a higher hourly wage than a W-2 employee. But as small business owners themselves, they know their task well, need minimum to no training, and understand a client's needs. More often, the relationship between a small business owner and the independent worker is that of a partnership.
While many 1099 workers get paid by the hour, not all do. Some prefer to be paid by the project or on a retainer basis. Furthermore, many also require advance payment. This advance may be used to buy supplies and prepare for your project.
Since an independent contractor works outside of your company, they are not required to abide by the employee handbook or any other policy not stipulated in their contract. However, the policies they comply with are often the most important ones, such as non-solicitation and confidentiality clauses. Remember that attempting to force an independent contractor to abide by the employee handbook can result in an employee misclassification lawsuit. According to both the ABC Test and the IRS test, a 1099 worker is not required to act or work as a company employee.
The good news is that employers often save on benefits spending when it comes to hiring a contractor. Depending on your state, part-time employees may also be eligible for certain benefits, including sick leave, paid time off, disability insurance, and health insurance. Independent contractors pay their own insurance plans, and therefore, the only cost an employer has to consider is the worker's rate.
Ultimately, a contractor is classified by their independence. They work on their own schedule with minimum interference from the client. They are not technically an employee and should be given fairly free reign when it comes to where and how they work. Meanwhile, a part-time employee is a W-2 employee and must work according to company standards.
That said, when is it more beneficial to hire a 1099 worker over a W-2 employee? Here are some scenarios:
Okay, so you’ve made your decision to hire an independent contractor. What’s next? All the employee onboarding to training rules don’t necessarily apply to the 1099 contractor. Both small business owners and HR managers can benefit from figuring out sound contractor agreements and security measures.