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When hiring workers in the U.S., employers often need to choose between two solutions: W-2 (employee) and independent contractors (ICs). Both play vital roles in the workforce, but there are important distinctions that can have legal, financial, and operational implications for employers.
A W-2 employee is someone who is directly employed by a company and receives a regular paycheck, typically subject to payroll deductions such as Social Security, Medicare, and local state taxes. The company (employer)s is required to provide workers' compensation and contribute to benefits such as, healthcare.
Control: Employers have significant control over how, when, and where the work is done.
Benefits: Employees often receive benefits like health insurance, retirement plans, paid time off (PTO), and more.
Payment of Taxes: Employer and employee taxes are automatically withheld from the employee’s paycheck, including state taxes, Social Security, and Medicare.
An independent contractor (IC) is an individual or business who provides services to other corporations under a contract. ICs work on a sole trader or corp to corp basis and are typically paid per project, hour, or milestone, and are paid a gross pay rather than net.
Control: ICs have more control over how they perform their work and typically set their own schedules.
Benefits: ICs are responsible for their own benefits, such as healthcare, and are not eligible for company-provided perks like paid time off (PTO).
Payment of Taxes: ICs are responsible for paying their own taxes, including both the employee and employer portion of Social Security and Medicare (through an annual self-employment tax).
Tax and Legal Compliance: Misclassifying workers can result in serious penalties. The IRS uses specific criteria to determine whether a worker should be classified as a W-2 employee or an independent contractor, including reviewing the level of control the employer has over the worker's duties and schedule.
Cost Differences: Independent contractors may seem like a cheaper option, as employers don't have to pay benefits, payroll taxes, or workers comp. However, contractors may charge higher rates due to their lack of benefits and job security. Additionally, depending on the role, there may be costs associated with finding, managing, and terminating contract workers incorrectly.
Flexibility vs Control: Employers who need greater control over work processes, schedules, and performance should lean toward hiring W-2 employees. For projects that require specialised skills but are short-term or irregular, independent contractors may be a better fit.
Risk Management: W-2 employees typically receive more legal protections, including workers' compensation and unemployment insurance. Independent contractors, on the other hand, assume more risk and are less likely to seek legal action unless their contract terms are violated.
While W2 employees and independent contractors both play vital roles in the U.S. workforce, understanding the differences in taxation, benefits, control, and job security can help individuals and businesses make more informed decisions about their working relationships.
And when those decisions have been made, remember our international payroll service is here to help. By providing an in country payroll service, we employ candidates on your behalf and take responsibility for managing the onboarding and payroll of the employee including paying employer and employee taxes, providing benefits and registration in each state leaving you and your clients to focus on pursuing your growing ambitions.
PayStream’s International Payroll brings together the same service and expertise you already know - guaranteeing that international work, works.
For any additional support speak to our friendly and experienced International Payroll team today.
