What is the Difference Between W-2, 1099, and C2C?

The demand for contingent workers is expanding rapidly. A report from Intuit noted that 80% of US corporations with contingent workers are expected to exceed 40% of the total workforce. It also comes as no surprise that the pandemic accelerated the development of contingent workforces.

For this reason, it’s becoming increasingly important for hiring managers and job seekers alike to understand what it means to be a worker engaged with 1099, "C2C", or W-2 terms and what the difference is between being an employee, a contractor, or a subcontractor.

What are contingent workers?  

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Staffing Industry Analysts (SIA) define Contingent Work as:

“work arrangements that differ from regular/permanent, direct wage and salary employment. Contingent work and workers are primarily distinguished by having an explicitly defined or limited tenure…”

Contingent workers are people who a company engages for a fixed period. Such workers can have either long-term or short-term contracts. A contingent worker can be an independent consultant, freelancer, contractor, part-timer, or someone who’s in an alternative working arrangement.

The benefit to companies working with contingent workers is that it provides greater flexibility, can help with talent acquisition, and saves money. Kayla Raynor, HR Lead at nTech Workforce explains, “it reduces the administrative burden for the company… there’s a lot of time and money involved in recruiting, hiring, onboarding, and then managing employees.”

With contingent workers, companies can receive the benefits of good workers without having to carry the responsibilities of building and managing winning teams. Perhaps most importantly, moving to a contingent workforce means more flexibility which Raynor says is “because a contingent workforce can be ramped up or down pretty quickly” making companies better able to adjust to external factors.

What are the differences between w-2, c2c, and 1099 Workers?

A W-2 employee is a regular, Common-Law employee

The employer pays the regular portion of taxes and withholds and remits the employee’s portion of their taxes directly to the IRS. Through the company, W-2 employees are also often provided with worker's compensation, employment, and disability insurance, sick days, vacation time, retirement contributions as well as any other health and wellness benefits. 

• Pro: The benefit of having W-2 employees is that they are more consistently engaged in the work and that sometimes means they are better able to contribute to the work of the company. Companies also have more control over their regular employees and how, when and where they do their work.
• Con: The biggest downside to W-2 employees is that they can cost the most for employers, and employers do not have the flexibility to expand and shrink their workforce as needed, which can lead to excess spending during some periods and a lack of capacity in others.
  

According to the IRS, "If you have an employer-employee relationship, it makes no difference how it is labeled. The substance of the relationship, not the label, governs the worker’s status. It doesn’t matter whether the individual is employed full time or part time."

1099 workers are independent Contractors and self-employed

These workers take on the burden themselves for things like remitting their taxes and securing their own benefits.

• Pro: Working with 1099 hires can save on costs since the employer does not need to worry about submitting taxes or acquiring benefits for the worker.  Typically, 1099 workers are specialists who are brought in for finite projects to cover extra capacity needs or provide project-specific assistance.
• Con: A 1099 worker is essentially a freelancer, and because they are brought on for quick stints, Raynor admits that “they may lack company loyalty because they’re not really an employee of your organization…They have their own priorities.”
  

According to the IRS, the general rule is that a contingent worker may be considered an independent contractor if the company has the right to control only the result of the work – not the right to control what the worker does or how the worker achieves the result and not the right to control how the worker is paid or which tools the worker uses. Additionally, there should be written contracts between the independent contractor and the company to define work, and the independent contractor should neither provide a critical service to the company nor have access to company benefits. The IRS focuses on common law rules for determining the degree of control and type of relationship.

But the IRS isn't the only agency with rules. The U.S. Department of Labor focuses on the "economic reality" test under the Fair Labor Standards Act (FLSA) for determining independent contractor status. 

C2C Workers are contracted through staffing agencies

C2C refers to "Corp-to-Corp" or corporation-to-corporation, a subcontracting arrangement involving an end client, a primary staffing company (C) to (2) further subcontracted staffing companies (C). As Raynor notes, it is a multilayer relationship where unlike with 1099s, “ where they’re paying an individual worker, it involves paying another company for the services.”

• Pro: C2C workers’ recruitment, retention, benefits, and compensation are all managed by the staffing agency. As well, companies have the flexibility of being able to expand and shrink their workforce as needed.
• Con: As with 1099 workers, C2C workers may not have the same level of experience, company loyalty, or expertise as is typically expected from W-2 employees.

C2C arrangements are common in the technology sectors or professional services sectors and allow staffing companies to cast the widest net possible for their clients, partnering with other staffing companies to fill vacancies for their clients. Each company is responsible for its own operations and payments flow through each entity. These arrangements are governed by contracts between each entity, with flow-down provisions for ensuring consistency of an end client's expectations.

Why is it important for hiring managers to understand w-2, c2c, and 1099?

The fact is that 84% of companies have benefited from significant savings by transitioning to a better-leveraged contingent workforce. Moreover, companies around the world put over $500 billion toward procurement services in 2019.

It has become incredibly important for hiring managers to understand the difference between W-2, C2C, and 1099 workers. For Raynor, understanding the difference means making “informed business decisions about what makes the most sense for the company’s needs.” Just as importantly, better understanding mitigates against misclassifying employees, which, Raynor warns, “can have legal and financial consequences for a business.”

If your company is looking to save money and reduce administrative capacity by bringing on contingent workers, reach out to nTech Workforce today to bring on the best in the business.