Difference Between W-2 Employees and 1099 Contractors
W2s and 1099s are tax forms used to deduct payroll taxes on different types of employees. There are crucial differences that as a business owner you need to understand to classify your employees correctly with the IRS. Not doing it can put you in severe trouble with the IRS. Those issues can end up with you paying a penalty or even receiving a misclassification lawsuit.
Business owners and employers tend to have a hard time correctly classifying their employees. However, it’s important to understand how to do it.
We understand it’s a complex matter, but we are here to help you. You can classify workers as W-2 employees and 1099 contractors. Both work differently and are not taxed in the same way.
What’s a W-2 Employee?
W-2 employees are full-time or part-time workers who tend to have a consistent schedule with a company. Some work under an employment agreement that specifies the employee’s salary and the employee benefits they receive.
This type of worker is the most common on US payrolls. Employers need to file some documents such as a Form W-9 when hiring a W-2 employee. That’s because employers withhold income taxes from their paychecks.
As per the IRS guidelines every employer that hires an employee and pays a salary of at least $600 or more per year and withholds social security, or medicare taxes are required to complete a W-9 Form
What’s a 1099 Contractor?
1099 contractors are often considered self-employed. Employers hire them to address specific problems and work on individual projects. They are not a part of the company that hires them and stay only while they do the job they were assigned to do.
These workers have more freedom than W-2 employees regarding how they do their jobs. That means they may choose their hours and often will work remotely. Unlike their relationship with W-2 workers, employers don’t have as much control over what a 1099 contractor does and how they do their job.
1099 contractors are often freelancers and do related jobs. They tend to have more than one project at a time. These workers are held accountable for their taxes. However, when hiring a 1099 contractor, you have to file an IRS Form, too.
Employers tend to hire 1099 contractors when they need help from an expert to work on a specific project. That’s because these workers tend to be specialized and only take jobs that require them to use their expertise.
What’s the Difference Between a 1099 contractor and a W-2 Employee?
At first glance, the primary difference between these types of employees is the consistent schedule. While W-2 employees stay with the company for a long time, 1099 contractors typically only stay until they finish the project they were hired to do.
That comes with other differences regarding how they do their job. As said before, employers have control over how W-2 employees do their job when they do it, and the tools they use to do it. 1099 contractors have to look for their own resources and the tools they use to do the job. However, that means they also work under the schedule and conditions they like better.
Since they work under different conditions, they also get paid differently. W-2 workers are paid on a regular basis. That means employers pay them a specific salary each month, weekly, or biweekly. 1099 contractors tend to get paid per project, but this depends on the contract or agreement they have.
Regardless of that, W-2 employees enjoy benefits that 1099 contractors don’t have. Employees have different benefits that are stated in the employment agreement. Those benefits can be Workers’ Compensation, vacation bonuses, health insurance, etc.
Both W-2 employers and 1099 contractors receive a form to report their income taxes. 1099 contractors get a 1099 form and W-2 employees a W-2 form. They use them to report their wages, tips, and personal incomes.
1099 contractors pay their own taxes. This doesn’t happen with W-2 employees since their employers have to withhold their income taxes
Summarizing it all, these are the main differences between them:
W-2 employees often stay with the company for a long time while 1099 only do the project the employers hired them to do.
1099 contractors get paid hourly or per project while W-2 employees usually have a set salary.
They are taxed differently. Employers need to pay attention to the employees’ wages to pay their taxes while 1099 contractors are self-employed and take care of their taxes.
Employers set their employees’ schedules and the resources they use to do their job. Contractors use their tools and work on the schedule they like best.
Misclassification lawsuits are a serious problem. Getting in trouble with the IRS can be stressful and bring numerous disadvantages. To avoid that, the best you can do is analyze the information given on this page regarding how to classify your workers.
Here are some ways to determine which type of worker your employee is:
Determine and analyze if you have control over your employee and their work.
See if you have control over how you pay your employee and if you have to supply them with different resources.
Analyze your contract and agreement to see if your employee has employee benefits and things of the sort.
You always need to keep in mind the differences between a 1099 contractor and a W-2 employee. Understanding your relationship with both of them makes paying your taxes easier and helps you avoid problems with the IRS.
Many people worry about which type of worker they should hire. However, there’s no way to tell which one is better since both are good for different things. If you need someone who specializes in one thing for a one-time project, then hire a 1099 contractor.
If you want someone who stays with you for the long term, then W-2 employees are for you. However, keep in mind that if you hire W-2 workers you need to invest time in training them and helping them get used to your company’s work environment.
We understand it’s complex to keep track of your taxes and how to pay them. Yet, if you focus on it, you can do it with no trouble.
Regardless of that, if you need money to hire your employees or solve a business emergency, you can always count on us! Here at GoKapital, we can give you all the financial assistance you need to solve all your problems and see your business grow.