Recently, this question appeared on LinkedIn:
What’s the benefit of hiring a W2 versus hiring a 1099 consultant for the same job? I’m interested in your opinion when comparing a W2 to a 1099 hire. Thanks.
This is the answer that was given:
I can’t think of a reason to put someone on W2 instead of a 1099. If the need is for a permanent, full time position, then W2 is generally the way to go. If the work doesn’t fit this category, I can’t think of a reason to use a W2 employee.
Well, they kind of got it right.
It seems there is a trend to move more and more work to Independent Contractors rather than hire employees directly onto payroll. The answer above is missing a few very critical points, particularly what is the legal definition of a contractor; and can my job be filled by a 1099 worker or must I use a W2 employee?
The answer here is as simple as two little words. A Duck. If it walks like a duck and quacks like a duck, it’s a duck. In other words, if the position requires the employee to be directed as to how, when, where and with what to do the job, then get quacking… he is a W2 employee. If however, the job will be done independently, then a 1099 may be the way to go.
Think of a roofer. If you call someone to fix your roof you don’t tell them what size nails to use, how to swing the hammer, which guys will work and when lunch break is. That is because they are independent (AKA 1099) contractors. Now if you have an administrative assistant who is required to be at the office at 9am, dress according to code, take lunch at noon, use Microsoft Word on an office computer and report to a supervisor, that’s a W2 employee.
This is serious stuff.
Employee misclassification is something that the Feds aren’t messing with. From large businesses to mom-and-pop shops, the fines are everywhere and they’re not cheap. Take a look:
- After five years of litigation, The Orange County Register in California agreed to pay $22 million to settle a suit involving the misclassification of workers as independent contractors.
- The Department of Labor ordered three construction companies to pay $491,100 in back wages and damages to 99 employees who were misclassified as independent contractors, in addition to another $108,900 in civil fines.
- A prominent shipping company settled a series of class action lawsuits alleging worker misclassification to the tune of $27 million. Previously, the IRS had already ordered the company to pay $319 million in back taxes and penalties.
Estimates are that 20% of businesses misclassify workers; so make sure your business isn’t included in this nasty statistic.