United States Employment Law and Sales Teams Sales—And the Sales Outsourcing Solution

1099 or W-2 Sales Employees?

The United States is one of the largest and most affluent markets in the world, which makes it a lucrative destination for many international businesses seeking to expand market share in a country with nearly unlimited room for growth. Compared to many other countries, the business environment in the United States is fairly friendly, and employment regulations relatively uncomplicated.

However, if your company intends to market its products directly to American businesses via a direct sales team, it is important to understand how employment regulations work in the U.S., especially as they relate to sales staff. Here's a short primer on U.S. employment law to help you make the most of the options available to you in the United States labor market.

Employment Law in the United States

In the United States there are two major ways to classify workers: as independent contractors (1099) or as employees (W-2). Each employment designation is intended for a certain type of job and employer/employee relationship. For the majority of positions, one or the other designation is clearly appropriate. But sales positions straddle the line between the two employment designations, leaving the option of how to hire employees up to the employer.

Whether to use the 1099 or W-2 designation for your sales force is one of the most important and far-reaching decisions you will make when building a sales team in the United States. Therefore, it is imperative to know the differences between the two designations and be sure that you are taking advantage of the one that will work to the  best advantage of your business.

The names of the two employment designations (1099 and W-2) come from the respective tax forms used to report a worker’s earnings.

The 1099 tax form designates each sales professional as an independent contractor, meaning that he or she functions essentially as a separate business entity and is responsible for paying all employment taxes. Under law, 1099 independent contractors are self-employed and have no official relationship to your company as employees.

The W-2 form, on the other hand, designates the worker as an official employee of your company. In this second case, your company is required to pay a part of the employment taxes, as well as assuming other government-mandated employer responsibilities.

Differences Between 1099 and W-2 Workers

The United States Internal Revenue Service (IRS) defines an employee as a worker whose hours, training, and way of performing duties are dictated and controlled by the company.

An independent contractor, on the other hand, typically has more control over his or her schedule, and performs the job in a more self-directed way, often off of the premises of the company. (For official guidance from the IRS see: http://1.usa.gov/14u429E.)

Because sales professionals are typically more independent than other workers, many companies like to take advantage of the tax benefits and simplified hiring procedures of the 1099 process. However, while the W-2 model involves more upfront costs and a more complex hiring procedure, the trade-off is often worth it for companies seeking the consistent production and high quality brand representation afforded by W-2 employee sales representatives.

Outsourcing Your U.S. Sales

A final option for companies entering the United States is to engage an outsourcing company to build a sales force and take care of all the paperwork and hiring. For a company that is unfamiliar with U.S. employment regulations, an outsourced sales function can take the guesswork out of the hiring process and allow the company to conduct its U.S. expansion more easily. If you choose the outsourced route, do inquire and make sure that the outsourcing company utilizes a W-2 rather than 1099 sales force.

For a more in-depth guide to the differences between 1099 and W-2 workers in the United States, please see our white paper, W-2 or 1099? Choosing the Right Type of Sales Representative.