Practical Considerations between W2 and 1099 Employment
Most companies today understand the advantages of a mixed and varied workforce. Many employers, including healthcare companies, have needs that do not fit perfectly into a fixed, full-time schedule. Many workers, too, prefer a flexible model of working, especially in a post-COVID workforce. The Internal Revenue Service (IRS) classifies workers into two categories, 1099 workers and W2 employees. These two different types of work contracts result in different rights, responsibilities, and tax implications 1. Both, however, present with a set of advantages and drawbacks with implications for business owners in the context of today’s workforce landscape. Health professionals considering different forms of employment should know the differences between and implications of both W2 and 1099 employment.
A 1099 contractor is a self-employed individual who operates on a contractual basis with businesses. Unlike W2 employees, 1099 contractors are not employees and do not enjoy benefits like paid time off or health insurance. They are responsible for managing their own taxes 2. W2 employees, in contrast, are employed directly by the company and are therefore entitled to employee benefits. Their employers are responsible for withholding from their wages local, state, and federal taxes as well as Social Security and Medicare taxes 2. Within the healthcare field, positions falling under either 1099 or W2 employment can be very diverse. Examples for 1099 employment include providers that contract part-time or “moonlight” at multiple locations, while examples for W2 employment include many full-time positions at a single institution for healthcare providers, management, and administration.
As small business owners, independent contractors may be sole proprietors or have their own incorporated business. They have built their business around specialized services they provide. They sometimes have a business name and perform work for multiple clients. A company’s relationship with a 1099 worker is thus that of a business-to-business relationship 3.
1099 workers are independent professionals. Within the specifications of their business contracts, they work when, where and how they want. Naturally then, while W2 employees typically receive oversight or direction from a manager, a client has little to no control over how a 1099 worker fulfills their contract 3. In so doing, independents may have their own employees, subcontractors, or partner consultants to help them complete work tasks 3. That being said, many healthcare companies have requirements for any 1099 workers that they employ in order to meet safety standards.
In general, while W2 employees typically receive some sort of training surrounding their job duties, 1099 contractors provide specialized expertise to a project 3. Independent workers operate in every sector of the economy and must demonstrate a high level of specialization in their industry. Most 1099 workers say they receive work assignments because they provide a specialized skill that requires special training, certification, or specialized education.
Unlike traditional employees whose jobs may span a wide range of duties and tasks, independent contractors are solely responsible for performing the services outlined in a contract or Scope of Work 3.
Rather than working for a specific salary, independent contractors get remunerated by submitting invoices for their work. Payment terms are thus discussed during initial contract negotiations. Independent contractors may have a standard billing rate for their services, or their rate can vary depending on the type of work performed and the client 3. On the flip side, W2 employment involves a set salary but workers can also see benefits provided by their employer. Companies do not have to provide traditional benefits such as health insurance, stock options, or retirement plans to 1099 workers. Legally independent workers also do not receive legal protections (including unemployment, anti-discrimination, and Workers’ Compensation) as employees. It remains good practice, however, to make sure that independent contractors have basic insurance requirements built into their contract to guard against any legal issues.
In recent years many talented individuals in many fields, including healthcare, have chosen to revisit their employment model and work independently as freelancers and contractors, switching from a W2 to a 1099 or perhaps adding a 1099 on top of existing work. This is part of and will remain an essential element of the new, dynamic workforce landscape.
References
1. 1099 vs. W-2 Workers: The 5 Key Areas of Difference | Tax1099 Blog. Available at: https://www.tax1099.com/blog/1099-vs-w-2-workers-key-areas-of-difference/. (Accessed: 5th December 2023)
2. Understanding the Difference: 1099 Contractors vs W-2 Employee Explained | Taxfyle. Available at: https://www.taxfyle.com/blog/1099-vs-w-2. (Accessed: 5th December 2023)
3. W2 vs 1099: 10 Differences Employers Need to Know – MBO Partners. Available at: https://www.mbopartners.com/blog/misclassification-compliance/10-differences-between-independent-contractors-and-employees/. (Accessed: 5th December 2023)