5 Differences Between an Independent Contractor and a Part-Time W-2 Employee

Small business owners need to hire temporary workers for a variety of reasons — seasonality, replacing employees on leave, and finishing objectives before the end of the year. But with the rise of freelance workers and the popularity of independent contractors, deciding what kind of worker to hire can be less clear cut.

The problem is that worker classification is serious business. Misclassifying an employee can mean thousands of dollars in fines from the Internal Revenue Service. So getting this right is crucial to avoid potential lawsuits and hefty penalties.

So what’s the difference between the two? While it’s not necessarily a walk in the park, it’s possible to define. And once you’ve done that, it’s possible to figure out who you need to hire and when.

5 differences between a 1099 contractor and a part-time W-2 employee

Distinguishing an independent contractor from a part-time W-2 employee isn’t easy. After all, both works for short periods of time and have flexible schedules. Both may be brought on for seasonal work or a special project, and both can be paid by the hour. And to be honest, a part-time employee and 1099 worker can both have more than one client. So which worker do you really need?

Well, it depends on many factors, including your budget and needs. But understanding the difference between an independent contractor and a W-2 employee, beyond the different filing forms, is a good way to determine which worker would benefit your business.

understanding the difference between an independent contractor and a W-2 employee, beyond the different filing forms, is a good way to determine which worker would benefit your business.

1. Contractors are business owners

First off, a 1099 worker is a business owner. They pay their own taxes, may manage their own employees, and are highly specialized. As a result, contractors might charge a higher hourly wage than a W-2 employee. But as small business owners themselves, they know their task well, need minimum to no training, and understand a client’s needs. More often, the relationship between a small business owner and the independent worker is that of a partnership.

2. Contractors may not be paid by the hour

While many 1099 workers get paid by the hour, not all do. Some prefer to be paid by the project or on a retainer basis. Furthermore, many also require advance payment. This advance may be used to buy supplies and prepare for your project.

3. Contractors don’t have to follow company policy

Since an independent contractor works outside of your company, they are not required to abide by the employee handbook or any other policy not stipulated in their contract. However, the policies they comply with are often the most important ones, such as non-solicitation and confidentiality clauses.

Remember that attempting to force an independent contractor to abide by the employee handbook can result in an employee misclassification lawsuit. According to both the ABC Test and the IRS test, a 1099 worker is not required to act or work as a company employee.

4. Contractors don’t require employee benefits

The good news is that employers often save on benefits spending when it comes to hiring a contractor. Depending on your state, part-time employees may also be eligible for certain benefits, including sick leave, paid time off, disability insurance, and health insurance. Independent contractors pay their own insurance plans, and therefore, the only cost an employer has to consider is the worker’s rate.

5. Contractors work when and how they want to

Ultimately, a contractor is classified by their independence. They work on their own schedule with minimum interference from the client. They are not technically an employee and should be given fairly free reign when it comes to where and how they work. Meanwhile, a part-time employee is a W-2 employee and must work according to company standards.

When should you hire a contractor over a W-2 employee?

That said, when is it more beneficial to hire a 1099 worker over a W-2 employee? Here are some scenarios:

• You have a one-time specialized project that will be completed within 1-3 months. A 1099 worker is likely a better candidate for this project since it is short-term and will require no maintenance or upkeep. Some examples include website development, a special marketing campaign, or a store renovation.
• You don’t have the budget for employee benefits. If you need some additional help but don’t have the budget for even part-time employee benefits, it might be worth it to bring in a professional as a contractor for a limited time.
• Your regular employee is going on leave. Rather than replace your valued team member, whether they are on sick, on bereavement, or on maternity leave, a 1099 contractor will keep operations going until their return.
• The holiday rush is coming, and you need workers on location. Seasonal upticks in traffic tend to mean you need someone on location who knows your specific store. And since this is a regular annual event, bringing on a W-2 part-time employee makes more sense.
• You want to test an employee before hiring them full time. You may want a full-time employee in some cases, but you’ve had a bad experience hiring. In these situations, it’s better to hire a W-2 part-time employee whom you plan to bring on full time.
• You have a specific business process or operations that cannot be altered in any way. If your business model requires you to supervise all employees, and it also demands that these employees work in very specific conditions, a W-2 part-time employee would be preferable. Hiring a 1099 worker in strict working conditions could lead to misclassification liability.

More on managing independent contractors

Okay, so you’ve made your decision to hire an independent contractor. What’s next?

All the employee onboarding to training rules don’t necessarily apply to the 1099 contractor. Both small business owners and HR managers can benefit from figuring out sound contractor agreements and security measures. Check out our free downloadable guide for all of that and more.