1099 vs W2 Employee
Plenty of marketing agencies—much like your own—use 1099 workers to fulfill client demands. Rather than increasing payroll costs, many agencies opt to call upon key talent as needed. From your perspective, 1099 independent contractors are ideal. They offer three core positives: financial flexibility, access to specialized experience, and speed to market. They only hit your books when they work on a project that covers their costs. With their specialized expertise, 1099 workers also provide speed to market when you don't have the time to onboard a new full-time staff member after a recent client win.
Sometimes, you might access your 1099 talent for most (if not all) of your client projects. That’s when the line begins to blur as to whether your worker is a 1099 independent contractor or W2 employee.
1099 vs W2: Understanding the Difference
The names “W2 employee” and “1099” are derived from their respective tax forms. Understanding the difference between the two is crucial in avoiding penalties and back taxes from the IRS. The IRS has what it calls "common law rules," which are questions to help you determine the difference between independent contractors and employees. During this process, you should also peruse the laws of your home state and the state where the contractor is doing work, as many states have their own common law employee tests.
In order to assess the degree of control and level of independence of your 1099 talent (according to the IRS), consider the following three questions.
Behavioral: Does your agency control or have the right to control what the worker does and how the worker does their job?
Financial: Are the business aspects of the worker’s job controlled by your agency? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?
1099 vs W2: Calculating the Cost Difference
When you tap into 1099 talent, there are a number of perceived cost savings. With 1099 independent contractors, you are not paying federal income taxes, unemployment taxes for unemployment insurance, social security, or Medicare taxes. Additionally, you don't have to pay for any other benefits you might offer employees, such as health insurance and retirement savings.
Despite these differences, the perceived cost savings are usually unrealized. Independent contractors will typically ask for a higher rate than you pay your employees because they must take care of the above-mentioned taxes and benefits on their own. According to the U.S. Bureau of Labor Statistics, benefits are worth about 30% of a worker’s total compensation package. With this in mind, you can expect to pay a 1099 independent contractor a minimum of 30% more than W-2 employees to match employee compensation with benefits.
The true financial benefit of independent contractors lies in an entirely different aspect: they are usually only called upon for short-term projects, so there is matching revenue to offset costs. This provides financial flexibility when your client or internal priorities shift and you no longer need specialized expertise.
1099 vs W2: Which is Better for Your Agency?
The answer to this question is tricky: it depends. The type of worker you hire depends on your agency and client needs. If you require specialized help for a client assignment, then an independent contractor might be the right fit. But if you need someone in account services to manage one of your retainer clients, then a W2 employee might be the right choice. Keep in mind that choosing between an independent contractor and an employee comes down to two key factors—your agency's budget and your appetite for control over how, when, and where they do their work.
One resource I've seen many agencies use with much success are creative staffing firms and virtual assistants. These organizations provide access to a pool of qualified workers without having to worry about classifying them as either 1099 independent contractors or W2 employees. The organizations themselves will send you an invoice, allowing you to record the cost as a business expense on your books. Additionally, you get the benefit of specifying day-to-day tasks and deciding how long you'll keep the individual working at your agency.
Closing Thoughts
Determining how to best staff your agency is one of the most important decisions you'll make as an agency leader. As I like to say, there are two camps in every agency: the promise-makers and the promise-keepers. Your goal is to ensure that you have access to the right talent—those who can help keep the promises you make to clients every day.