How Do Worker Classifications Affect My Business?

The U.S. government estimates there are more than 10 million independent contractors, or “1099 employees.” But what are the ramifications of hiring these “gig workers” for your business? 

There are a myriad of differences between adding someone to the payroll and hiring an independent contractor. The biggest, of course, is cost. The Bureau of Labor and Statistics estimates that hiring a contractor can save about 30 percent of total employee costs. 

Employers with W-2 employees are required to pay Social Security and Medicare taxes (FICA), unemployment taxes (FUTA and SUTA), workers’ compensation insurance, as well as withholding and remitting an employee’s portion of income taxes. Then there are the benefits, including medical, dental, vision, disability insurance and, perhaps, a retirement plan such as a 401(k). 

While employers and employees split the 15.3% tax rate (6.2% for Social Security and 1.45% for Medicare), independent contractors are responsible for the full amount. Because 1099 employees pay their own taxes and insurance, their hourly rate tends to be higher (much higher in some cases) than a salaried employee. 

Independent contractors can be a good solution for work that is a short-term project, specialized, outside of the scope of the business, and doesn’t require set hours. They are also easier to terminate than a payrolled employee. 

Employees, on the other hand, may be a better option if the work is ongoing, central to the business operations, collaborative and requires set hours.  

HIDDEN COSTS 

While 1099 employees may cost less, they can be more of a hassle to deal with. Because they are allowed by law to dictate their own hours and to work with other clients, their availability may not be suitable. A contractor may jump ship or put your project on hold if they get a better offer. 

What’s more, contractors are limited to 1,040 hours of work per year for a single employer. So, if a project isn’t done in that timeframe, you may find yourself having to bring another contractor up to speed just to finish a job. 

Employers typically either pay for an employee’s supplies and equipment needed for the job or reimburse the employee. The issue of training and development must also be considered. 

If you’re not sure which way to go, it often makes sense to start a worker out as a 1099 employee, says Janice Fritz, HR specialist at Kuzneski Insurance Group, because “it is easier to move from an independent contractor to an employee than the other way around.”