Accurately classifying your workers is an important part of keeping your business compliant. Not only that, strategically hiring a mix of 1099 and W2 employees can help you scale your business more quickly.

To stay competitive in the free market, you need to maximize your pay structure and choose the payroll structure that is the best for your business. This means knowing when to hire a full-time employee or temporary contractor depending on the work you need done.

In today’s post, we’ll explain the key differences, drawbacks, and advantages of hiring an independent contractor versus an in-house employee.

Difference Between Employee and Independent Contractors 

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W2 Worker

These are traditional employees who can participate in all of your benefit programs, be it a company-wide 401(k), PTO, or HSA plan. Unlike contractors, you have more control over this type of worker. However, you must withhold federal taxes, pay payroll taxes, and incur various other expenses.

If you misclassify an employee as an independent contractor, you can be subject to thousands of dollars in fines or even jail time.

1099 Worker

Independent contractors are self-employed. Granted, you don’t have to pay benefits or payroll taxes. So, you can potentially save money with these types of workers that you can reinvest to scale your business.

 

Missouri Labor Laws to Remember 

Labor laws vary by state. However, the Missouri Department of Labor states that employers who improperly classify their workers can face monetary penalties of $50 to $1,000 per day for each worker and up to six months in jail per violation.

Reportable & Non-Reportable Worker Income for Missouri

 

What to Report

  • Any worker, whether part-time, temporary, or casual, who falls under “covered employment” is basically anyone doing a service in exchange for payment.

What Not to Report

  • Workers who act as “direct sellers,” delivering or distributing advertising materials or pamphlets for pay.
  • Services in exchange for credit hours or academic credits from students.
  • Income that is given to not-for-profits, family employees, or churches.

How the IRS Classifies Workers

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The IRS uses three categories to classify the type of worker that you have.

  • Behavior: They examine the relationship between the company and the worker and whether or not the business controls how the work gets done. If there’s a lot of control, W2 is the best choice. If not, choose a 1099.
  • Financial Relationship: Is the payment method controlled by the employer or set by the employee?
  • Type of Relationship: Are there worker benefits? And if so, what kind? Is there a strict agreement on the time of employment?

File the online SS-8 Form to help the IRS classify your employee(s) correctly. It often takes up to 6 months to hear back from the IRS.

 

Tax Advantages of Hiring a W2 vs 1099 Employee

The tax advantages of hiring a 1099 employee are straightforward. You don’t have to pay for all the extra expenses associated with a traditional hourly employee, such as worker compensation, healthcare benefits, office expenses, training, equipment, company Christmas parties, etc.

 Benefits of Hiring a 1099 Employee

  • Less legal risk (employees carry their own insurance)
  • Lower volume of administrative work for benefit plans and tax forms
  • Hiring someone with specialized expertise
  • You can scale your business faster by only paying for the skillsets you need
  • Increased flexibility to work at various hours of the day

Benefits of Hiring a W2 Employee

  • Employees can carry out your vision for the company more fully
  • More work performance consistency and reliability
  • You can save tons of onboarding hours for new company projects and tasks
  • They can help you with tedious, day-to-day tasks of running the business

Which Employee Type Should I Choose? 

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As you can tell, payroll expenses cut into your profits quickly. So, if you want to scale in the early stages of your business, hire a 1099 contractor. If you’re looking to scale at a mid-stage, where you need loyalty and long-term team members, go with a W2 employee.

The decision is based on your needs. If your business has a specific service or task that needs to be completed by using a particular method every single time, use a W2 employee. If you need temporary help on a short-term project and want a specialist, go with a 1099 contractor.

 

Tips for Classifying Employees Correctly 

To accurately classify workers, it is critical to look at several factors.

Closely Examine the Employee-Employer Relationship

Review the three categories used by the IRS to determine the employer-employee relationship and ensure that you assess it accurately. The three categories are:

Behavioral – Does the company control how the worker performs the job? Or does the worker decide how to approach the work?  If the company controls how the work is performed, then the worker is a W2 employee.

Financial – Who controls the timing of payments? Who pays for job supplies, and are expenses reimbursed or not? If the company must make payments to the work based on invoices or contractual agreements, then the worker is a 1099 contractor.  Generally, contractors will also pay for job supplies and equipment up front and the contract will state if they are reimbursable or included in contracted price.

Type of Relationship – Is the relationship on going with no end? Or does it end at the completion of a project with no further obligations on either side? If the relationship is done at the end of the project, then the worker is a 1099 contactor.

Make sure the employment contract aligns with the actual duties of the job. For example, if an employee’s job duties reflect that of a 1099 worker, yet you’ve hired them on as a W2 employee, it’s a red flag for the IRS. If there are any discrepancies, correct them immediately.  Make sure you have the right documents to prove to the IRS that an employee is an independent contractor should the need arise.

Keep a record of the following documents:   

  • Payment information paperwork
  • Independent contractor agreement form
  • W9 form

Worker classification can be a bit confusing. To avoid the costly risk of inaccurately classifying employees and to remain compliant on a federal, state, and local level, invest in help. You could choose an experienced CPA or an employment attorney. An expert will be able to help you with things like classification audits (a review of duties that comprise a position) and more.

Connect with Tax Experts at Abacus CPA Today

Our team of dedicated tax experts will help you elevate your business performance over time. Call Abacus CPAs today to discover what expert financial practices can do for your gro

wing business.

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Accurate worker classification ensures compliance with labor laws and helps avoid significant penalties, including fines and jail time. It also helps strategically manage payroll and scale your business effectively.

W2 employees are traditional workers who receive benefits and are subject to payroll taxes, while 1099 contractors are self-employed individuals responsible for their own taxes and do not receive employee benefits.

Hiring a 1099 contractor can save money on benefits and payroll taxes, reduce administrative work, provide specialized expertise, and offer greater flexibility in working hours.

W2 employees provide consistency, reliability, and can better align with the company’s vision. They are ideal for long-term roles and can handle daily operational tasks efficiently.

Employers in Missouri can face monetary penalties ranging from $50 to $1,000 per day per misclassified worker, and up to six months in jail per violation.

The IRS uses three criteria: Behavioral control (who directs the work), Financial control (how the worker is paid and who provides supplies), and the Type of Relationship (is the work ongoing or project-based).

Hire a 1099 contractor for temporary, project-based work requiring specialized skills. Opt for a W2 employee for consistent, long-term tasks that align with your company’s vision and operational needs.

Any service performed in exchange for payment by a part-time, temporary, or casual worker should be reported. Exceptions include direct sellers, students earning credit hours, and workers for not-for-profits or churches.

Maintain records such as payment information paperwork, independent contractor agreements, and W9 forms to prove the correct classification of workers to the IRS.

To ensure accurate classification and compliance, review the worker-employer relationship based on IRS criteria, align employment contracts with actual job duties, keep necessary documentation, and consider consulting a CPA or employment attorney for expert advice and audits.