W2 or 1099? Choosing the Right Type of Sales Representative. A white paper brought to you by Netpique.

Transcription

1 W2 or 1099? Choosing the Right Type of Sales Representative A white paper brought to you by Netpique.

2 Introduction Whether you are experimenting with using a direct sales team to introduce a new product or are dedicated to establishing a long-term sales force for your company, one of the most important and far-reaching decisions you will make is whether the sales professionals should be official employees of the company (W-2) or independent contractors (1099). Each designation carries costs and benefits, and a careful prior review of the designations and their implications can save you valuable time, loads of money, and endless frustration. A third, often unexplored option is to combine some of the benefits of 1099 and W-2 by taking advantage of the services of a sales outsourcing company. This white paper will explore the differences between these various options and help you determine which type of employee designation best fits your company s needs. Page 1 of 9

3 Tax Status As usual, the IRS has a finger in this pie. In fact, the two employment designations (1099 and W- 2) come from the tax forms used to report a worker s earnings. The 1099 tax form makes each sales professional an independent contractor, meaning that he or she functions essentially as a separate business entity and is responsible for paying all employment taxes. 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. Regulatory Differences The 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: Sales is a rather unique area that straddles the line between these two designations, giving you wide latitude in choosing a 1099 or W-2 sales force. However, once made, this choice will impact virtually every aspect of your company s sales experience, including sales management, recruitment, headcount maintenance, training, cost forecasting, company culture, and most importantly, performance. So be informed, and make sure you go into your sales venture with eyes wide open W-2 Outsourced Independent Contractor Rep Pays Own Taxes Makes Own Schedule Official Employee Company Pays Taxes Works Set Hours Outsourced Employee Taxes Included in Outsourcing Works Set Hours Page 2 of 9

4 Recruiting and HR 1099 sales people are cheaper, easier, and quicker to hire, and companies usually acquire them without the background checks, drug tests, and DMV screenings that best practice dictates when hiring W-2 sales people. A 1099 worker involves no risk to your company of future unemployment or workers compensation claims, and expects no benefits, vacation time, or 401K plan independent contractors typically work on a full-commission basis, eliminating the fixed cost of the base salary normally offered to W-2 sales professionals. Because of the paperwork, expense and time involved in hiring full-time, salaried W-2 employees, you might be tempted to opt for the ease of simply hiring a steady stream of 1099 sales people. However, as we will explore in-depth in subsequent sections, unless you sell a very simple, low-end product with little need for brand protection, you may find that a 1099 sales force causes more problems than it solves. Maybe you have no sales recruitment and HR structure in place, but want the stability and quality of a W-2 sales force. Or perhaps you are coming back to the drawing board after getting burned trying the 1099 shortcut. If you feel daunted by the robust internal resources required for constant sales recruitment and HR, a final option is hiring a sales outsourcing company, which can take care of the recruiting and HR burden while providing the benefits of a W-2 model. Most reputable outsourcing companies hire their sales professionals as W-2 employees of the outsourcing company, performing the required background checks and screenings, as well as providing all necessary employee benefits. However, there are a few outsourcing companies out there that like to cut corners by hiring 1099 workers themselves, effectively negating the benefits of outsourcing. One of the first questions you should ask when considering the services of an outsourcing company is whether their salespeople are W-2 or Headcount Maintenance Let s be honest: sales can be a burnout job. So it s no surprise that maintaining headcount is likely one of your sales manager s worst headaches. Unfortunately, this is one of the areas where a 1099 sales model can leave you high and dry. Independent contractor sales representatives are by definition less invested in your company, and more likely to simply quit rather than seeking assistance if they are having problems. And even when they stick around, they often work only part-time or sell for multiple companies simultaneously, resulting in a much higher risk of brand mis-representation. Page 3 of 9

5 Ironically, the limited risk involved in hiring each individual 1099 representative tends to lead to less stringent standards in the quality of reps being hired, perpetuating a vicious cycle of unproductivity and voluntary or involuntary terminations. A common pitfall for companies employing the 1099 model is to end up exhausted, focusing simply on keeping a certain number of representatives, with little energy left over for attention to productivity. Low-Quality Reps Hired Terminations Unproductivity There do exist a relatively few golden superstar representatives who actually prefer working 1099 because they can have more control over their schedules and leverage their extraordinary skills to make a lot of money. However, the core of reliable, steady producers a company needs to maintain consistent production can best be attracted by and maintained on W-2 s, where they have more security, better support and training, and are less likely to quit. Once you ve gone through all the rigmarole to hire on a few W-2 salespeople, you might be tempted to keep them on come hell, high water, or a decline in production. However, in the long run keeping unproductive reps can affect your bottom line at least as much as hiring on new ones. Attrition happens inevitably in sales, although more slowly and less unpredictably with W-2 employees than with 1099 contractors. Hence, maintaining a bench of potential employees who can be hired quickly is important to maintain productivity. This bench of qualified and prescreened candidates should be as large as 20-30% of the present sales force to ensure that sales numbers will continue uninterrupted. Your recruiters should be constantly reaching out to potential hirees and proactively inviting them to consider selling for your company. Page 4 of 9

6 If this all sounds overwhelming, you may want to consider exploring the option of an outsourcing company, which can take care of the entire burden of recruitment and hiring, leaving you free to focus on your company s core competencies. Another advantage of an outsourcing company is that personnel costs become measurable and predictable, since your company is charged only for reps in the field and most outsourcing companies guarantee the maintenance of a full, productive headcount. Training As we learned in the section on regulatory differences, the degree of training provided is one of the key indicators the IRS uses when determining whether a worker should be classified as an employee or an independent contractor. Regular sales training meetings are key to maintaining an effective sales force, and as salaried employees, W-2 sales representatives can be required to attend these meetings as part of their job duties. During training sessions, sales managers can teach sales techniques, educate their representatives about the company s brand and product offerings, roll out new products, and conduct individual evaluations and troubleshooting sessions. If you decide to go with 1099 reps, you will still likely elect to offer at least some degree of sales training. However, the constant disappearance of team members as they quit or are fired does tend to dilute the effectiveness of even the most robust sales training program. To add further frustration, a sales force composed of independent contractors will not necessarily see the value in spending time at sales meetings when they are getting paid by the sale. Even if your company makes sales training a priority, it will have difficulty requiring attendance of salespeople on a straight commission compensation structure. If your company ends up unable to maintain consistent attendance at sales training meetings, you should be worried not only about poor performance, but also about possible brand misrepresentation from reps who have only a vague idea about your company s product offerings, procedures, and values. Trainers and managers will also have less of an opportunity to nip problems in the bud or discover and correct dishonest or unprofessional sales practices. Unless your product is simple enough that selling it requires little or no training, and your company is not worried about preserving a quality image in the marketplace, a W-2 sales model is likely your best chance at a well-trained, responsive sales force that can represent your brand in the way it deserves to be represented. Page 5 of 9

7 For a company attempting to roll out a new sales initiative without a dedicated sales management structure already in place, the significant work involved in planning, structuring, and conducting sales meetings might be too much, taking key upper management away from other pressing duties. In these cases, a full-service sales outsourcing company may be the answer, because it can provide not only sales people but also experienced managers and a fully developed training program tailored to your business, enabling new sales people to quickly become effective and new products or offerings to be seamlessly integrated within only a few days or weeks. Sales Management Theoretically, independent contractor sales representatives are self-managing. However, they may or may not manage themselves in the way your company wishes. It is difficult to require daily activity and production, let alone a set schedule, from 1099 contractors who are being paid only for the sales they bring in. With a W-2 sales model, it is easier to establish positive, productive interactions between sales reps and their managers. Every sales initiative should have its own dedicated managers who monitor their sales reps full-time and conduct regular evaluations. One-on-one mentorship is another critical aspect of sales management, and managers should conduct ride-alongs and periodic performance reviews. Reps tend to perform best when they are required to check in daily with the number of visits, presentations, and closes they have achieved. Quality of management can also have a huge effect on employee retention. Sales representatives who feel they have the attention and support of their managers become more productive and are happier and more likely to stay with the company. It is evident, then, that before beginning your search for sales people, you should be investing significant thought and resources into recruiting and hiring experienced and effective sales managers. Your sales managers are responsible for setting the tone for your sales initiative and ensuring that your product and company values are carried out into the market untarnished. A sales manager can make or break your entire sales team. Page 6 of 9

8 Daily Monitoring Effective Training Mentorship If you have little experience in hiring good sales managers or lack the resources to build a positive, high-energy sales culture for your company, it is worth looking into finding a sales outsourcing company, where the expertise, professionalism, and management skills come ready made. If you do go with the outsourcing option, be sure to find a reputable company that maintains your brand s integrity by offering dedicated managers and reps who work exclusively on your campaign. Scalability A crucial component of any sales model is its scalability. Most organizations using direct sales to reach customers would like to be able to launch additional markets or product lines, as well as expand existing markets. Because of difficulty maintaining headcount, a 1099 sales force often has a hard time achieving sales objectives even at maximum productivity, let alone executing a rapid expansion. Independent sales reps are, well, independent. They work at their own convenience, and lack the buy in to get excited about a new initiative or company expansion because there is so little room for advancement for them within the company. Additionally, the diminished feasibility of corralling 1099 salespeople into intensive training makes it difficult to quickly add large numbers of well-trained reps to support an expansion. A well-functioning W-2 sales force provides the groundwork to enable expansion into new markets. However, while most aspects of recruiting, training, and management can eventually Page 7 of 9

9 be mastered by a company with enough time, resources and money to throw at them, scalability presents a bigger challenge. Campaign scalability requires additional internal support staff to support the growing number of field sales reps. These additions create extra costs and add HR restrictions, including paperwork, approvals and funding. Taking sales support staff from one market to another is costly, and difficult to accomplish overnight. And scaling down a campaign can be even more of a nightmare, involving either sudden layoffs or keeping on expensive personnel who are no longer adding value. The area of scalability is where outsourcing companies truly shine, enabling speedy and smooth expansion into new markets or products, as well as pain-free downsizing when necessary. In a high quality outsourcing company, the recruiting team works continually to provide immediate scalability. The number of reps can be throttled up and down depending on market conditions. Outsourcing enables the quickest time to break into new markets or expansions, with potential turnarounds of under 30 days. An outsourcing company can also parachute reps from existing markets into new markets to decrease ramp time. If first mover advantage is a priority for your company, a sales outsourcing solution can help you enter each new market ahead of the competition and remain competitive once you get there. Hassle-Free Recruitment Effortless Scalability Reduced HR Burden Sales Outsourcing Effective Management Guaranteed Headcount Page 8 of 9

10 The Takeaway Although hiring 1099 independent contractors as sales reps can seem like a quick and easy solution, W-2 sales reps are much more likely to result in consistent production, a positive sales culture, and professional brand representation. If sales is not your company s core competency and you need help starting out or the security of quick ramp-up times and easy scalability, consider speaking with a sales outsourcing company to see how they can tailor a sales solution to fit your needs. This white paper is brought to you by Netpique, which offers a full range of sales consulting and outsourcing options. Want to talk? To see how Netpique can help you improve your sales strategy, please call us at (386) or visit us on the web at Page 9 of 9