Hiring the right talent is vital to the long-term success of your business. Naturally, as a business owner, you already know how costly the whole hiring process is. From recruitment and interviewing to training and onboarding, bringing on new employees takes time and money. And if, like most business owners, you must also navigate some degree of turnover, you know how much poor hiring decisions can compound these costs.
The right employee can add untold future value to your organization. But a bad hire can diminish the quality of your output, impede productivity, and negatively impact fellow employees. So there’s a lot riding on your hiring decisions. Part of managing the risks and maximizing the rewards of the hiring process is choosing the right employment structure for your team.
It’s no secret that the so-called gig-economy has dramatically expanded the role of independent contractors, or 1099 employees, in the labor market. A recent article from the Chamber of Commerce notes that, as of January 2024, 57% of Americans participate in the freelance economy, and the number is only growing.
Freelancers are providing diverse services like writing, design and data entry, and this employment arrangement is growing in popularity among employers and employees alike. But just how much should your business depend on the work of independent contractors? And how much of your work should remain in the hands of stable, trusted, long-term W2 employees?
Each type of employment relationship has distinct legal, financial, and operational implications for both employers and workers. Understanding the challenges that come with each option can help employers make more informed decisions based on their unique needs.
Below, we discuss the pros and cons of each employment relationship:
The Pros and Cons of Hiring W2 Employees
W2 employees are the workers on your payroll. With this more traditional employment structure, your employees may be either salaried or hourly wage workers. With W2 employment, you will typically withhold taxes, provide benefits, and engage in the costly hiring process described above.
Generally speaking, businesses that are focused on long-term stability, leadership development, and lower turnover will prioritize W2 hiring. Below, we take a closer look at both the pros and cons of this employment structure:
The Pros of Hiring W2 Employees
There are a few really good reasons to build your business on the strength of W2 employment. The benefits of this employment structure all suggest that this is a great way to create and sustain long-term growth:
- Commitment: W2 employment is a more robust agreement of commitment between both employee and employer. When you hire a W2 employee, the goal is generally to integrate this individual into your company culture and workflow. The W2 also implies an agreement on the part of the hiree to work within the parameters and norms of your organization as well as align with rules of conduct, participate in performance evaluations, and contribute to long-term company goals.
- Consistency: A W2 employment structure implies a certain degree of stability. W2 employees are more likely to develop loyalty to an organization, to pursue internal leadership opportunities and to help build institutional knowledge over time, rather than taking this knowledge with them into other employment opportunities.
- Improved Recruitment Outcomes: Offering stable W2 employment with comprehensive benefits can be to your organization’s advantage as you court prospective employees in an increasingly competitive labor market. Offering health insurance, retirement plans, paid time off and other benefits can help make your business more attractive to high-quality candidates and help you retain talent.
The Cons of Hiring W2 Employees
In spite of the clear benefits, there are also some real challenges that come with this approach. And in the current hiring climate, some of these challenges are actually prohibitive to extensive W2 hiring.
- Higher Costs: This is the most obvious downside of hiring W2 employees. In addition to the base wages of your employees, you’ll take on a whole host of additional expenses including payroll taxes for Social Security, Medicare, and unemployment insurance; workers’ compensation insurance; and benefits packages. Add to this the cost of recruitment, hiring, onboarding, and training, and every single W2 employee may be costing your business a small fortune.
- Higher Turnover Stakes: Naturally, good long-term hires can be well worth the expense. But businesses that struggle with high turnover may be putting themselves at financial risk by committing the capital required to attract, employ, and then ultimately replace W2 workers.
- Less Flexibility: W2 employment means you get a greater commitment from your employees, but it also means you owe your employees a greater degree of commitment as well. W2 employees expect regular working hours, predictable pay, and consistent operating conditions. This makes it more difficult for businesses to scale up or down as market demand changes, expenses fluctuate, or economic conditions shift. As we’ll discuss in the section below, contract employment makes it easier to scale with agility.
The Pros and Cons of Hiring 1099 Independent Contractors
1099 independent contractors, or freelancers, work on a contractual basis. 1099 contractors can represent an almost infinite array of service providers including consultants, technical support specialists, creatives, web developers, and temporary administrative support. Unlike W2 employees, 1099 workers are responsible for their own taxes. In addition, employers are not obligated to provide independent contractors with employment benefits.
Below, we take a closer look at the pros and cons of this employment structure:
The Pros of Hiring 1099 Independent Contractors
- Cost Savings: When you work with an independent contractor, you are not paying benefits, taxes, or insurance, which can significantly reduce your expenses. And because there is no long term commitment implied by this relationship, there is far less risk in assigning 1099 work without enduring the same period of vetting and training required for a new W2 employee. The peripheral costs per 1099 contractor are far lower than those associated with W2 employment.
- Scalability: Flexibility is naturally implied in your relationship with a freelance worker. When your business needs shift or your sales slow, you aren’t burdened by the difficulty of laying off employees nor do you lose the capital invested in their hire. With 1099 employees, you’re in the position to move as quickly as the market around you–bringing in support when the conditions demand and scaling back when this demand cools.
- Expertise: 1099 contractors are often highly skilled workers with specialized expertise. But you may not necessarily require access to these skills on a daily basis. Whether you look outside the company for a talented graphic designer, you outsource development of your website, or you keep a technical support specialist on call in case your network goes down, you are likely using a 1099 employment structure to pay for this service.
The Cons of Hiring 1099 Independent Contractors
- Diminished Quality Assurance: Working with independent contractors means that you are relying on the output of individuals who are not a part of your company culture. This means they may also not be accustomed to your organization’s workflow, regulatory conditions, and preferred methods of collaboration. This can cause miscommunication, inconsistency, and even missed deadlines, which underscores the importance of building long-term relationships with trusted contractors.
- Inconsistent Availability: Whereas W2 employees work according to predictable business hours, usually as dictated by their employer, independent contractors work according to their availability. Your 1099 contractors will typically manage full client portfolios and may have limited bandwidth for your project. When you’re depending on immediate task prioritization, and rapid turnaround, W2 employees may be preferable to independent contractors.
- Lack of Loyalty: Even the best independent contractor is likely only committed to your business on a per-project basis. Of course, it’s nothing personal. But your independent contractor may have little attachment to, or knowledge of, your long-term business goals. This may mean that some independent contractors are valuable short-term assets but may not be suitable for building long-term partnerships.
Finding the Right Balance With a Hybrid Approach
The point of outlining the pros and cons above is not to suggest that one employment relationship is better than the other. Clearly, there are benefits and challenges that come with both. But the good news is that your business doesn’t have to choose between W2 employees and 1099 contractors.
Today, most employers use some balance of the two–a core group of full-time employees supported by a network of independent contractors. This hybrid approach gives you the best of both worlds—access to dedicated, long-term employees, combined with the flexibility and cost savings of freelancers.
But the pros and cons highlighted above all contribute to one important conclusion. Even more important than how you hire people is who you hire to fill each of these roles. Some positions and personnel will thrive in committed, long-term W2 roles while others may do their best work for you as independent 1099 contract workers.
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The right balance between long-term and freelance hires will depend on the unique needs and nature of your business. We designed our personality assessment test to help you find that balance.
The Success Portraits Personality Test (SPPT) examines 19 critical personality traits. How prospective employees score in each of these areas can tell you a lot about how they might best fit into your organization.
For instance, the SPPT suggests a likely correlation between individuals who work well on their own and who score high on traits like Achievement Striving, Need for Autonomy, and Self Regulation. A prospective hire who meets your job description and scores particularly high in these areas might be a good fit for a 1099 independent contractor role.
Alternatively, the SPPT suggests that an individual who scores high on traits like Business Acumen, Assertiveness, Social Intelligence, Trust, and Vision may be more likely to demonstrate success working on a team, as a leader, and alongside higher-ups. In other words, high scores in these areas may suggest an individual who is a good fit for long-term growth with your organization as a W2 employee.
Of course, every organization has different hiring needs and every prospective employee represents a completely unique permutation of personality traits. Take a closer look at the traits we measure, how we define them, and how they can help you make better hiring decisions.