Types of Workers in the U.S.
When you’re starting to do business in the U.S., it’s really important that you understand the terminology around the different types of worker engagement. There are three main engagement models: W-2, Corp-to-Corp (C2C), and 1099.
1. W-2 Worker
A W-2 is an employee and refers to a worker who is either permanent and on a salary or a contractor paid at an hourly rate. W-2 workers are the most common types of engagement in the U.S., even in the contract staffing market.
Classifying Workers as W-2: What Does it Mean for Employers?
If a worker is classified as a W-2, the employer has various responsibilities. The employer’s (which also could be a recruitment/staffing company or employer of record) responsibilities include:
Employment taxes
Insurances
Providing adequate benefits for the workers
Paid sick leave requirements in eligible states
Being fully compliant with employment law in the state they are operating in
2. Corp-to-corp (C2C)
With a C2C engagement, you’re engaging with a company rather than an individual. This is not exactly equivalent to an Ltd company engagement in the UK but has some similarities. (Side note: it’s possible for a contractor to have their own single member LLC and still be classified as a 1099 or sole proprietor).
You should approach engaging these workers with caution as there are significant risks around classifying incorrectly. Ensure that you have a bullet-proof classification process and a thorough paper trail. If you are a beginner in the US market, you should avoid these types of workers and stick with W2 to protect your business from liability.
3. 1099 Worker
A 1099 worker is a freelancer or sole proprietor. These workers are common in the gig economy (for example, an Uber driver). Generally, businesses hire these workers to complete a specific task or work on a specific project as defined in a written contract.
It’s difficult to compliantly engage with 1099 workers for longer term projects and full time roles. There have been lengthy heated debates around the misclassification of independent contractors recently in the U.S., with many large companies receiving hefty fines (Uber, Microsoft, Lyft, and more) so it is very important to remain compliant if you are considering engaging 1099 workers.
Why is it Important to Understand the Difference Between the Types of Workers in the U.S.?
It’s important as a business owner to understand the difference between the different worker classifications when hiring workers in the U.S. for a few reasons.
Avoid financial penalties - Misclassifying a worker as an independent contractor can result in serious financial penalties from the IRS or an employee misclassification lawsuit against your business.
Tax purposes - The way you classify a worker affects how both your business and workers are taxed. If you engage W-2 workers you’re required to withhold income taxes and pay taxes on their wages. You don’t usually have to withhold or pay taxes when paying 1099 contractors, that is their responsibility.
Know where you stand with your worker’s schedule - The way you classify your worker determines how much control you have over their schedule, payments, and job role. For example, 1099’s define when, how, and where they work. If you engaged W-2 workers, you determine their work schedule.
Unsure Where to Start When Hiring Workers in the U.S.? Use an Employer of Record
It can be confusing trying to get your head around the different types of workers in the U.S. when you are trying to grow and establish your business. If you want one less thing to worry about, using an employer of record (EOR) is an easy route to managing compliance. The EOR will take on the risks and responsibilities of engaging workers and you won’t even have to set up a local entity.
Disclaimer: All information written here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.