Once your business passes the $1M mark, hiring isn’t just about getting help—it’s about building the right foundation for sustainable growth. Whether you’re expanding your team to handle client delivery, bringing on operational support, or outsourcing specialized projects, one question always comes up: Should I hire a W-2 employee or bring on a 1099 contractor?
This isn’t just a tax classification issue. It impacts how you lead, how your team functions, and how much control you have over the work being done. And if you get it wrong? It can lead to compliance issues, misaligned expectations, and serious financial consequences.
Let’s break down the differences, so you can make informed decisions that support your growth and protect your business.
What It Means to Hire a W-2 Employee
Hiring someone as a W-2 employee means they’re officially on your payroll. You withhold their taxes, pay a share of payroll taxes yourself, and issue them a W-2 form at year-end. But the relationship goes far beyond the paperwork. As their employer, you’re responsible for managing their workload, providing tools or equipment, and adhering to labor laws regarding overtime, benefits, and workplace protections.
W-2 employees tend to be best suited for ongoing roles that are core to your business operations—people who are embedded in your systems, culture, and client experience. You control how, when, and where they work, and they typically work under your direct supervision.
If you’re building a high-performing internal team, this route offers the most control and cohesion. But it also comes with more responsibility: you’ll need processes for onboarding, payroll, benefits (if applicable), and compliance.
When a 1099 Contractor Might Be a Better Fit
A 1099 worker is an independent contractor—someone who invoices you for services rendered. You don’t withhold taxes or provide benefits. Contractors work on their own schedule, often using their own tools and systems, and they retain control over how the work gets done as long as the final result meets your expectations.
This model can work well when you need short-term help or specialized expertise. Think website developers, graphic designers, copywriters, or consultants who step in for a specific project. You’re not committing to a long-term employment relationship, and your administrative load stays lower.
But there’s a fine line here. If a 1099 contractor is working full-time hours, attending all-hands meetings, and relying on your tools or systems to do their job—it may trigger an employee classification in the eyes of the IRS or Department of Labor, even if you call it something else. That’s where businesses can get into trouble.
Choosing the Right Fit for Your Business Stage
At the $1–5M level, your business has likely outgrown casual or unclear team relationships. You need the right mix of structure and flexibility—and clarity on how each role contributes to your goals.
Hiring a W-2 employee gives you more control and consistency. You can ensure brand alignment, build team culture, and offer benefits that support retention. These team members can grow with you, deepen your operations, and provide stability.
Hiring a 1099 contractor offers access to targeted expertise without the long-term commitment. You can scale capacity up or down quickly, reduce overhead, and maintain agility in fast-changing seasons.
But one is not inherently better than the other. What matters is aligning the role with the structure that fits your vision, cash flow, and operational strategy.
A Few Key Differences to Keep in Mind
When evaluating the type of hire you need, consider the following:
- A W-2 employee is subject to labor laws and entitled to benefits and protections if offered; a 1099 contractor is not.
- With W-2s, you cover half of payroll taxes; with 1099s, the contractor handles it.
- You can train, schedule, and manage a W-2’s work; with a 1099, you focus on outcomes, not process.
- W-2s are typically more integrated and invested in your business over time; 1099s are often working with multiple clients at once.
As your business scales, your team structure needs to evolve with it. That might mean bringing internal roles in-house to reduce risk or continuing to outsource specialized support so you can stay nimble. Both models can work—but not when used interchangeably or without intention.
Missteps to Avoid
One of the biggest mistakes growing businesses make is hiring a contractor when they really need an employee—and treating that contractor like a full-time team member. It feels easier at first: less paperwork, no payroll setup, and more flexibility. But if that contractor is logging 30 hours a week, managing internal systems, and attending team meetings, you could be crossing legal lines without realizing it.
On the flip side, some founders lock into full-time W-2 relationships too early—before the role is fully defined, or when revenue doesn’t support a long-term commitment. That can create unnecessary pressure on cash flow and lead to resentment if the role doesn’t work out.
Clarity, structure, and aligned expectations will save you every time.
Questions to Ask Before You Hire
Making the right choice often starts with the right questions. Consider these before extending an offer:
- Is this work temporary or ongoing?
- Do I need control over the process, or just the outcome?
- Will this person need access to internal systems, clients, or brand voice?
- Is this role critical to daily operations or supporting a one-time initiative?
- What’s the long-term vision for this role?
- Can the business financially support an employee relationship right now?
These questions don’t just protect you from misclassification—they help you build the kind of team that aligns with your mission and model.
Build a Team That Matches Your Vision
At this stage in your business, hiring isn’t about checking boxes—it’s about choosing the right kind of support to match your goals, structure, and growth strategy. Whether you need deep, embedded team members or specialized external partners, the key is to make each decision with clarity.
If you’re second-guessing whether your current roles are structured the right way, or if you’re preparing for your next strategic hire, don’t navigate it alone. Aligning the role, the budget, and the business model from the beginning can save time, energy, and money.
Want to learn more? Here’s our Enrolled Agent’s take on hiring and compliance from a tax perspective: Read the full breakdown at Varsity Tax Prep
