Many companies are faced with a need to hire more employees without the certainty of continued necessity. Some hire independent contractors and some hire through temporary or staffing agencies, believing that this will provide all of the benefits without all of the costs. This is partially true, as in either case, the company is not responsible for paying the employees’ social security taxes, benefits, unemployment insurance or workers’ compensation premiums.
However, choosing to use only independent contractors can lead your company to legal risk and financial penalties down the road if you are not careful.
Know that the IRS has strict rules about whether a contingent worker is an independent contractor (1099) or a W2 employee. Neither the hiring company nor the individual performing the work can simply decide that the individual is a 1099 worker – this must be determined by consulting both state and federal regulations.
If a company files only 1099s for its temporary workers, and the IRS then determines that those workers were in fact treated as employees or W2s, the company can be faced with paying back payroll taxes, including penalties and interest, as well as other fines. Employment liability issues regarding workers’ compensation may arise, or further tax issues if the 1099 worker does not pay taxes.
The best way to avoid these headaches? Hire your temporary employees through a reputable staffing firm that treats its personnel as W2 employees. The staffing firm pays the payroll taxes and covers workers’ compensation, unemployment, Social Security and Medicare. They often offer healthcare insurance and other benefits. By using such a firm, client companies can avoid the risk of misclassifying their temporary employees and running into legal troubles.
The upfront hourly costs for a W2 employee may be more expensive, but consider that you are paying for an additional bonus: Staffing firms often have a stringent set of on-boarding tests and assessments for W2 employees. This level of skill assurance ultimately benefits you and can provide more of an immediate impact on the project need.
If you are sure that you legitimately need only 1099 workers, if you are certain that your company is correctly following all guidelines for their employment, there are certainly benefits to such an arrangement.
However, employing W2 contractors through an established, professional firm gives your company the biggest benefit of all: highly qualified employees with low risk of negative financial and legal impact.