Construction contractors and, well, everyone, want to make as much money as possible. That’s why we often hear the W-2 vs 1099 question. Does one offer significant benefits over the other?
Read on as we unpack the differences between W-2 and 1099 pay.
What Is A W-2?
When employers hire “regular” employees, they are responsible for reporting all compensation paid to them on a Form W-2. This form will include the total paid to the employee that year. It will also list the amount of federal taxes, social security taxes, and Medicare taxes the employer withheld from the worker’s pay.
What is A 1099?
Freelancers, consultants, and contractors are typically only paid for the specific job an employer hired them to do. They aren’t considered permanent employees and don’t receive regular payroll checks. Instead of a Form W-2, these workers receive Form 1099-NEC if they were paid $600 or more from the employer during the year.
Related: 10 Tax-Saving Tips for Electricians and Electrical Contractors in Tennessee
W-2 Vs 1099: The Pros and Cons of each
Construction contractors must weigh the advantages and drawbacks of both classifications to ensure they’re making the right decisions for their business.
Pros of Being a w-2 Employee
As the more traditional employee arrangement, a W-2 employee classification offers quite a few advantages, like:
- Company benefits. In addition to an hourly wage or salary, a W-2 employee may receive lucrative benefits like paid time off and health insurance, and have access to retirement plans.
- Greater income stability. Both part-time and full-time W-2 employees are usually guaranteed a set number of working hours per week. This setup makes it easy to budget and plan for expenses, without worrying you’ll run short of money.
- Fixed hours. Most employers want their staff to work set hours every week. Being able to plan in advance allows employees to better balance their work and personal lives.
- Tax benefits. An employer pays part of its employees’ taxes, taking this financial responsibility off the individual.
Cons of Being a w-2 Employee
There are a few aspects of a W-2 classification that can negatively affect workers. These are:
- You have less flexibility. Employers often expect their staff to work set hours, which can pigeonhole a person.
- You don’t maintain as much control over your actions. W-2 employees must follow company guidelines on how to complete projects and tasks. They can also require you to physically go into an office every day. These rules can be stifling.
- All your “eggs” are in a single basket. While it’s true employees can work two jobs or maintain a “side hustle”, many opt to make one employer their sole source of income. If the organization experiences financial trouble, the employee may be out of a job (and income stream).
Pros of Being a 1099 WOrker
With the gig economy explosion, more workers than ever are being paid via 1099. Some of the upsides of this arrangement are:
- You maintain more control. Construction contractors can decide which jobs they want to take, how much they’ll charge, and the processes they’ll use to complete the work. This option also allows you to work the hours you want.
- You can write off more business expenses. A contractor or freelancer can take many types of tax deductions. A home office, internet connection, mileage (driven for work), professional memberships and dues, equipment, and other items can be written off.
- You won’t have “all your eggs in one basket.” Most contractors work with multiple clients. This setup lessens their financial risk. If one client leaves, contractors don’t lose their entire income stream.
Related: What Does a Tax Accountant Do for Small Businesses?
Cons of Being a 1099 WOrker
While a 1099 designation works for millions, it does have some drawbacks to be aware of, like:
- You’ll pay more taxes. It may seem that contractors make more money per hour than their W-2 counterparts, but they incur more taxes. Contractors must cover the self-employment tax, which can add up to thousands of dollars. In addition, 1099 workers don’t have the benefit of an employer withholding taxes from every paycheck. Coughing up the money at the end of the year can be a big burden (even though you can pay quarterly).
- Your income could be less stable. Depending on the same paycheck month in and month out helps employees budget easier. 1099 workers may go through dramatic ups and downs in income, depending on the season, economy, and numerous other factors. Even a bad Google review can damage your business.
- Lack of benefits. 1099 contractors typically don’t get to enjoy paid time off, employer-paid health insurance, and other perks that are common for W-2 staff.
Chaliff + Associates: Experts In Tennessee construction Contractor Accounting
Don’t wonder and worry about a 1099 vs W-2 designation on your own. Let us help you sort them out! We’ve partnered with dozens of construction contractors to help them with their bookkeeping, payroll, tax filing, and all other accounting tasks.
If you’re ready to stop worrying about your company’s accounting needs, schedule a call for a complimentary consultation.