Deciding whether to work as a self-employed independent contractor (1099) or as a full-time company employee (W2) may be a difficult decision. Much of it comes down to the industry you work in and what type of lifestyle you prefer.
Likewise, employers must determine whether to hire full-time workers or individuals who work on a contractual basis for certain roles or even entire departments. The emergence of the gig economy allows companies of all shapes and sizes to leverage the flexibility of a more dynamic workforce in their favor.
Of course, both sides present a number of pros and cons to consider. Looking at the advantages and disadvantages of self-employment as an independent contractor versus being a full-time company employee may help you decide which avenue you should pursue.
First, let's take a look at the pros of working as a 1099 independent contractor (many of which highlight the cons of being a W2 employee).
When working for yourself, you get to determine when, where, and how much you work each day. You have no boss to set the boundaries for you. You are your own boss.
However, being your own boss takes a hefty dose of self-discipline to be successful at it. You’ll need to set regular hours and adhere to a schedule you set for yourself, which is no small task.
Better work-life balance
Gone are the days when you had mandatory overtime to get a project completed because a co-worker was sick or didn’t pull their weight. No more losing hours each day because you’re stuck in traffic on your daily commute to and from work.
These precious hours lost can now be invested in your well-being. Whether it be more time for exercise or better availability to your kids when they get home from school, you’ll enjoy having a better balance between your job and your personal life. This can be very beneficial to both your physical and mental health.
No career limits
Instead of having to wait for the boss to approve new training or a new position with more responsibility, you have the power to decide how far you’re going to grow in your ability within your chosen field.
Maybe you want to specialize and need to attend classes or seminars to obtain additional skills. Or perhaps you want to take on more assignments that will stretch you and help you grow professionally. Regardless of what your goals are, you decide what you’re going to pursue and excel at.
Of course, self-employment isn't all fun and games either. Now, let's consider the downsides of working as a self-employed independent contractor (and the upsides of life as a W2 employee).
No safety net
To succeed independently, you’re going to need clients. You need to find prospects and bring them into the fold. Even if you’re bringing existing clients with you from a job, you’ll need to take excellent care of them in order to keep them. Customer retention is always cheaper than customer acquisition.
The process of client gathering is both stressful and time-consuming. It keeps you from doing the real work that you love doing. But there’s no way around it. Prospecting and selling will be a regular part of your work.
As a W2 employee, your employer pays 7.65% of your Medicare and Social Security taxes and you pay 7.65%. When you are paid by clients and file a form 1099 at tax time, you’ll be required to pay the employer's share of these taxes, meaning that the full 15.3% comes out of each client payment you receive. This is in addition to the income tax you’ll have to pay. That’s a considerable amount of money when you add it up at the end of the year.
No more employer-sponsored health, dental, life, and disability insurance plans. Gone is the 401(k) plan with the employer match. You bear the full responsibility of finding affordable benefits, which is a formidable challenge for the self-employed. This means going out and buying a disability insurance policy, funding a retirement plan, among many other things.
As you can see, being a 1099 worker carries with it both advantages and disadvantages. You’ll need to decide if the rewards outweigh the risks. Your age, health, marital status, and other factors may figure into your decision. Only you can decide which is the best option for you.
For employers, deciding whether to hire someone for a position or to use contract labor is based on several factors.
- Taxes are an essential consideration when deciding whether to hire someone or not. In addition to paying the 7.65% Social Security tax, unemployment taxes are substantial. Both federal and state unemployment taxes must be paid each pay period.
- Benefits also are expensive for employers. The cost of health insurance is very high for employers, even if they’re only paying for employee coverage and not the cost of family coverage. Administrative costs and fees for employer-sponsored retirement plans also must be considered.
- Training and supervision are hard costs an employer assumes when hiring. It takes considerable time and expense to train an employee to do their job. Frequently the company employs full-time trainers to teach employees the skills needed to carry out their duties successfully. And once the training is completed, a manager will be required to supervise the employee.
Even though supervision is an expense the employer assumes, it’s also a significant advantage it has. It’s challenging to find and retain talented and responsible freelancers. Employers often find themselves unable to keep the best freelance talent working on their assignments. Freelancers can easily decide to work elsewhere for better compensation to pay for benefits or simply disappear without completing the work for which they were contracted.
Having an employee on staff gives the employer the benefit of getting steady work done and fostering better company culture. Though they must offer competitive compensation, employers can count on good employees to be there and consistently churn out high-quality work.
When it comes to the "1099 vs. W2" debate, it can be tough for both workers and companies to choose which route to take. Each will need to take careful inventory of their long-term goals in order to decide accordingly.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.