W-2 or 1099? Best Practices for Hiring Sales Reps

Thinking of hiring a sales team? You'll have a lot of decisions to make about how you want to run your sales initiative. Perhaps the most important decision you will make is whether to hire your sales reps as W-2 employees or 1099 contractors.

While W-2 and 1099 are tax designations, the implications of the choice between them go far beyond simply how your company pays taxes. Before deciding on a designation, be sure to consider the following important implications:

Implications for Recruiting and HR

Companies are often drawn to the idea of hiring their sales people as 1099 contractors, because the 1099 designation allows sales reps to be quickly and easily hired and fired, eliminating the need for background checks, unemployment, workers' compensation insurance, and base salaries. 

However, the very shortcuts that make the 1099 model sound almost too good to be true often make it actually too good to be true. It is difficult to attract good-quality employees without offering the type of salary and benefits that make them look at the job as a stable, long-term opportunity rather than an interim solution to pay the bills until something better comes along.

Most companies find that the extra costs and time associated with hiring sales reps as W-2 employees pay off in the long run, resulting in a more stable, dedicated, and productive work force.

Implications for Sales Training and Management

U.S. tax law stipulates what type of control a company can exert over W-2 employees vs. 1099 independent contractors. 1099 contractors define their own schedule, pay their own taxes, and do their job as they see fit. By contrast, the IRS defines an employee as a worker whose hours, training, and way of performing duties are dictated and controlled by the hiring company.

In practical terms, these differences can have a major impact on your sales training program, and by extension, on the effectiveness of your sales team. Regular sales training meetings allow you to educate and motivate your sales team. You can require that your W-2 employees attend these meetings as part of their job duties. 1099 contractors, on the other hand, cannot be required to attend, and may not consider such meetings to be of value, especially if their compensation is based entirely on sales performance, with no base salary.

Even more detrimental to a sales training program is the constant attrition you should expect from a 1099 sales force. Sales reps that are constantly coming and going will have a limited opportunity to learn to perform well, and may even damage your brand by misrepresentation or dishonest and unprofessional sales practices.

While hiring your sales reps as 1099 contractors might seem easier and cheaper, in the long run you will likely have more success with a sales force composed of W-2 employees.