W2 vs. 1099 Employees For Home Service Businesses

As a business grows, employers grapple with the decision of whether to expand their workforce with W2 employees or 1099 contractors.

Both work classifications offer unique advantages and disadvantages, and the correct choice depends on the company's specific needs, goals, and operational structure. Some companies benefit from the stability, loyalty, and control that W2 employees provide, while others prefer the flexibility, cost-effectiveness, and autonomy of 1099 contractors. 

In this article, we’ll compare W2 vs 1099 employees for home service businesses to help you determine the best staffing strategy for your company. We'll delve into the pros and cons, benefits, and key differences between W2 and 1099 employees, as well as how these factors can impact your company's operations, finances, and legal obligations.

W2 Employees: A Brief Overview 

W2 employees make up a substantial portion of the US workforce, accounting for 61% of workers. 

Many gravitate towards W2 employment due to the stability and benefits it offers. Along with regular paychecks, W2 employees enjoy the benefits of health insurance, retirement plans, paid leave, and more.

W2 employees are typically considered permanent staff and are subject to tax withholding and other employer obligations. 

Let’s discuss why you should consider hiring W2 employees for your business.

What Is A W2 Employee? 

A W2 employee is a standard employee who works regular hours for a fixed wage or salary. They receive bonuses, employee benefits, insurance, and other forms of compensation, and are protected under labor laws.

W2 employees are employed for an indefinite period and are given consistent, ongoing work. They’re expected to adhere to company rules, scheduling, and tasks. 

Benefits Of A W2 Employee For Home Service Businesses

Here are some of the biggest  benefits of hiring a W2 employee: 

Control Over What They Work On 

One of the biggest advantages of hiring a W2 employee is that you have full control over how the work gets done and when. 

They work directly under your supervision, allowing you to dictate tasks, set deadlines, provide training, and implement quality control measures that align with your company’s goals. 

Workplace Consistency 

W2 employees contribute to workplace consistency. 

Since they’re directly employed by the organization, they’re expected to adhere to company policies and procedures. This results in a predictable work environment where everyone knows their roles and responsibilities. 

Long-term Commitment 

In a way, W2 employees can be considered long-term investments. By investing in their training and development, you cultivate a skilled workforce that can potentially drive your company forward. 

Loyalty and Motivation

Contracted employees are more willing to exceed expectations and put extra effort into their work, not only for bonuses but also for the potential of a promotion. This is unlike 1099 contractors, who only care about getting the project done and receiving payment. 

Flexibility 

As an employer, you can alter your employees’ workload to best fit the needs of your business.  You can easily adjust schedules, reassign tasks, or modify roles without needing to renegotiate their contracts.

1099 Employees: A Brief Overview

Freelancing services and contractual work are experiencing an upward trend as more individuals seek greater control over their work arrangements. While traditional employment accounts for 61% of workers, this figure has declined significantly from 81.7% in 2016.

As of 2023, 1099 employees make up 36% of the US workforce, encompassing approximately 64 million Americans. This represents a 4% increase from 2022 and a staggering 40% increase from 2016, showing the growing value placed on independent work.

What Is A 1099 Employee?

1099 employees are third-party contractors/freelancers hired by a company or business. 

1099 employees operate independently. They aren’t bound to long-term contracts and rigid schedules like full-time or part-time W2 employees. They set their own hours, rates, and services, all of which can’t be amended without renegotiating a contract. 

Generally, 1099 employees are referred to as independent contractors, freelancers, gig workers, or self-employed individuals. These workers receive a Form 1099 from the company they contracted with, detailing their annual earnings with no taxes withheld.

Independent contractors are expected to pay for their own self-employment taxes when they file their income tax returns, which include both the employer and employee portions of Social Security and Medicare taxes.   

Unlike W2 employees, 1099 contractors aren’t entitled to standard employee benefits such as health insurance, retirement plans, paid time off, or unemployment compensation. Though some competitive industries offer these benefits to attract and retain top talent, it isn’t that common.

1099 employees aren’t subjected to labor laws, either, meaning they aren’t entitled to the same protections as W2 employees. This includes rights such as minimum wages, overtime pay, workers’ compensation, and protection from discrimination. 

Benefits Of A 1099 Employee For Home Service Businesses

Hiring a 1099 employee comes with several advantages, including: 

Lower Cost 

One of the biggest benefits of hiring a 1099 employee is that they’re generally ‘cheaper’ than W2 employees. 

While you do have to pay the agreed-upon wages, 1099 workers aren’t entitled to paid time off, parental leave, employment taxes, health insurance, and other benefits at the expense of the company. Any time off they take is at their own expense. 

However, do keep in mind that you get what you pay for with 1099 employees. Don't expect them to go above and beyond their contractual obligations. Additionally, experienced contractors often command higher rates due to their expertise and the fact that they handle their own taxes and insurance.

Minimal Supervision 

Contractors have their own schedules and work under their own supervision. They might not follow the regular business hours but expect them to finish the job at the agreed-upon time. Most companies don’t mind how the contractor works as long as they submit results. 

Short-term Commitment 

Unlike W2 employees, 1099 contractors operate on a project-by-project basis. They aren’t locked in a long-term contract. As long as you pay for the time they spent working for you, you can let them go the second their work is submitted. 

This is advantageous because if a contractor isn't a good fit for your company, you can easily replace them without the complexities and legal repercussions associated with terminating a W2 employee. 

Advanced Skill Set 

When hiring a W2 employee, it’s often advisable to choose someone with a diverse skill set. 

You want this diversity because it makes them more flexible and adaptable to change. If the need arises to reassign them to another department or add new responsibilities, the transition wouldn’t be as jarring because of their broad skill set and willingness to take on new challenges. 

With 1099 employees, you don’t necessarily need that flexibility. You hire them for their specific skill set, making them the best choice for niche or highly technical projects that require extensive industry knowledge and experience.  

Key Differences Between W2 And 1099 Employees

W2 and 1099 employees carry significant implications for taxes, benefits, and legal responsibilities. Here are the key differences between the two: 

Employment Status

W2 workers are traditional employees who follow an employer-employee relationship. Meanwhile, 1099 workers are self-employed individuals who provide services to a client or business. 

Long-term vs. Short-term

W2 workers are generally employed for an indefinite amount of time. Many W2 positions are permanent, and it’s common for employers to extend their contract through renewals, promotions, or new project assignments if their work is satisfactory or exceeds expectations. 

In contrast, 1099 contractors work on specific projects for a predetermined period. Some 1099 workers stay with a company for years, but they're never expected to become full-time employees or receive the same level of job security as W2 workers. They can be let go at any point as long as they receive the agreed-upon payment. 

Taxes

With W2 employees, employers withhold federal, state, and local taxes from employee paychecks. 

Meanwhile, 1099 employees are responsible for their own taxes. This typically includes self-employment taxes (Social Security and Medicare), and income taxes.

Benefits

W2 employees enjoy company benefits like health insurance, paid time off, retirement plans, maternity and paternity leave, and others. 

1099 employees aren’t eligible for employer-sponsored benefits, and although some businesses do offer benefits to independent contractors as a competitive advantage, it isn’t the norm. 

Control

Employers have control over a W2 worker’s responsibilities, work hours, and workplace environment. They can ask an employee to work from home for several months and return to the site later. 

This isn’t the case with 1099 employees. 

Self-employed individuals have more autonomy over their work hours and methods. They aren’t obligated to work in the company or adhere to regular work hours. They can use their own equipment, tools, and materials to complete the tasks as they see fit. 

As long as they finish the job as discussed—legally and on time—the manner in which the work is accomplished isn’t usually important. The focus is on the result rather than the process. 

Legal Protections

W2 employees are entitled to labor laws, minimum wage, overtime pay, and workers’ compensation. If an employer violates these protections, W2 employees have the right to file complaints with relevant labor authorities and may be entitled to compensation. 

1099 workers aren’t legally protected under labor law. They aren’t guaranteed to be paid minimum wage, and can’t ask for overtime pay for the extra hours they worked on the project. 

They’re also not protected against anti-discrimination laws, so if they ever face discrimination in the workplace or by the employer, they can’t legally file a complaint. 

The most they can do is seek legal action through civil court if their contract terms are violated, such as non-payment for services provided. 

Tools And Equipment

W2 employees are usually provided with the necessary tools and equipment by the employer. 

If they initially worked on-site and transitioned to working from home, employers are obligated to provide them with the tools necessary for remote work. This can include laptops/PC, software, and internet connection. 

If they don’t have the tools available, the company must reimburse employees for the cost of acquiring or using necessary equipment and services. 

1099 employees, on the other hand, use their own equipment, software, and tools. Employers can ask them to use company equipment for security purposes, but 1099 employees can refuse if it compromises their ability to work efficiently.

NDA And Contract Reputation

W2 employees sometimes need to sign non-disclosure agreements (NDAs) or other contracts to protect the company’s confidential information and intellectual property. 

Oftentimes, these agreements are non-negotiable. If an employee breaks these terms, the company has legal grounds to take action against them. 

1099 employees aren’t obligated to sign an NDA or other contractual agreements. Unless specified in their contract, they have the flexibility to negotiate these terms. They may choose to sign if they agree with the conditions, but they’re not automatically required to do so.

W2 vs. 1099 Pros And Cons for Home Service Businesses

Here’s a summary of the pros and cons of hiring W2 employees vs. 1099 contractors for home service businesses: 

W2 Employees

Pros of Hiring a W2 Employee for Home Service Businesses

• Consistency and reliability: W2 employees can provide consistent and reliable service because they’re expected to follow the company’s culture and adhere to company standards and policies. If they violate these terms, they may face consequences ranging from pay deductions to suspension. 
• Loyalty and retention: Benefits and job security can increase employee loyalty and reduce turnover, leading to a more experienced and skilled workforce. 
• Brand reputation: W2 employees are often more committed to the company’s brand and image because they take advantage of the benefits given by the employer. If they do something that violates or ruins a company’s reputation, they risk losing said benefits and the security of a job. 
• Reduced risk of misclassification: Hiring a W2 employee reduces the risk of employee misclassification. Misclassifying an employee has severe legal repercussions, including criminal penalties, fines, and even imprisonment. 

Cons of Hiring a W2 Employee for Home Service Businesses

• Higher costs: Alongside basic wages, employers must also cover benefits (health insurance, retirement plans, paid leave, etc) and payroll taxes, which can be more expensive than hiring an independent contractor. 
• Increased administrative work: Hiring a W2 employee means increasing the workload of your administrative force. They’ll have to manage the employee’s payroll, withhold taxes, and ensure compliance with labor laws. 
• Training: When your company introduces new software, launches a product, or implements significant process changes, training falls on you as the employer. This isn’t the case with 1099 employees because they're expected to possess the necessary skills and knowledge to perform their tasks without on-the-job training.

1099 Employees

Pros and Cons of Hiring 1099 Employees for Home Service Businesses

• Cost savings: 1099 employees are generally less expensive to hire in the long run because they handle their own taxes, insurance, and benefits. 
• Specialized skills: 1099 employees often bring specializations and expertise that might not be available in-house. This allows businesses to offer a broader range of services without having to train existing employees.
• Ideal for short-term projects: 1099 employees are an economical way for companies to get help on short-term projects. Businesses can quickly access specialized skills without the overhead of hiring and training a full-time employee. Once the project is over, a business can end the contract with no legal consequences.
• Exempt from many federal regulations: With a 1099 employee in your team, there are fewer opportunities for violations and potential lawsuits. They can’t file complaints for workplace discrimination or harassment as W2 employees can. 
• Guaranteed work: 1099 employees get paid for the work they do. If they don’t deliver results or take time off due to illness or other events, they don’t get paid. This arrangement is advantageous for businesses because payment is directly tied to performance. 

Cons of Hiring 1099 Employees Employee for Home Service Businesses

• Less control: 1099 employees have more work autonomy than W2 employees. They have the freedom to determine the best methods, tools, and timeframes for completing their tasks. Once you’ve agreed on a contract, you can’t change the deadline, the requirements of the job, and the necessary tools needed to complete said job. 
• Temporary: Since they aren’t bound to a long-term contract, 1099 workers can move to a different job and client once their work with your company is done. You can hire them at a later date for new projects but you can’t guarantee their availability. 
• Lack of loyalty: Contractors aren’t tied to one employer or company. They can choose to work on multiple projects at the same time if they so desire. 
• Conflict of interest: 1099 contractors have the freedom to offer their services directly to the company's customers. This can pose a risk to the business as contractors might entice customers away by offering lower rates for the same services. 

Can't be paid on a salary: W2 won’t need to be paid overtime if they put in a few extra hours here and there in exchange for time off. This isn’t the case with 1099 workers. They must be paid for the hours they work, with no opportunity for comp time or similar arrangements.