Before deciding between hiring a W-2 employee and a 1099 worker, it’s beneficial to weigh the differences in costs between the two. Consider, depending on the job, one may be a more cost-effective option than the other.
As a high-level breakdown, W-2 employees are put on payroll, receive employee benefits, have taxes withheld, have supplies provided for them, and perform specific work responsibilities. An employer hiring W-2 employees should consider the total costs associated with hiring an employee in exchange for more control over the employee’s work guidelines.
On the other hand, 1099 workers are paid a flat fee for a job. They do not require training, do not have taxes withheld from their paycheck, do not receive benefits, but have more worksite flexibility and are paid higher wages because they do not receive the same benefits as employees.
Payroll Differences
Employers and employees typically split the cost of payroll taxes evenly. The employer pays 7.5% and the employee pays the other 7.5%. If you hire a W-2 employee at $20 an hour, expect to pay $20 x 0.075% = $21.5 an hour for a W-2 employee.
1099 workers have a higher wage because they must front the entirety of payroll taxes on their own. It’s not split with the employer. For the same job, a 1099 worker may be paid around $25 an hour.
Equipment and Training Differences
Onboarding a new W-2 employee can cost $4,000 when factoring in training costs, equipment, time interviewing the prospective employee, and more. Upon hire, any job site training must be provided by the employer. It can cost about $1,075 to train each employee.
All work equipment and supplies are expected to be provided by the employer for W-2 employees. Laptops, office supplies, tools, etc. are given to the employee at no extra cost.
- Laptops – approximately $1,000 per employee
- Office supplies (i.e. paper, ink, pens) – $77 per month
1099 workers do not require job site training, nor do they require employers to provide equipment. They are experts in their particular field, and already have the tools needed to provide the service they were hired for.
Any additional equipment or training they may need on the job is taken care of by the worker themselves. However, remember 1099 workers are paid a higher wage because they do not require training or supplies.
Benefit Differences
W-2 employees are provided benefits such as covered sick leave, and oftentimes medical benefits. Employers pay an average of $11.82 per hour for employee benefits. After calculating medical benefits, sick leave, stocking the office with coffee and snacks, tuition reimbursement, company retreats, and more, the salary for an employee ends up totaling at least 1.25 times more than their base salary.
An employee with a base salary of $60,000 will receive $75,000 with benefits added.
Unlike W-2 employees, 1099 workers do not receive the same benefits that employees do. They must provide their own insurance and account for any sick days themselves. The agreed-upon rate for the job is the set rate the employer pays the worker.
Misclassification costs
If EDD finds any of your W-2 or 1099 workers are misclassified, your business will be subject to fines and penalty costs. Typically, the agency fines $50 per misclassified employee or worker. However, additional charges are applied depending on the severity of the misclassifications because not correctly classifying either form results in incorrect tax form submissions.
Fines and penalties could include:
- 1.5% of employee wages to compensate for income tax withholding
- 40% of employee payroll taxes
- 100% of matching employer payroll taxes plus interest on each of these penalties
- Failure to Pay Taxes penalty of 0.5% of the unpaid tax liability for each month of delinquency
Read EDD’s full penalty reference chart here.
Stay ahead of misclassification costs by correctly verifying the status of your employees now. A got1099 report correctly identifies and classifies all of your employees by:
- Verifying the business
- Checking tax licenses
- Confirming the EIN number
- Conducting website research
- Providing staff support
Order your got1099 report here.
