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Independent Contractor vs. Employee

June 14, 2018

The Important Differences Between a 1099 vs. W-2

  • 1099s and W-2s are two separate tax forms for two different types of workers. If you’re an independent contractor, you get a 1099 … As a W-2 employee, payroll taxes are automatically deducted from your paycheck, and then paid to the government through your employer

Determining which to use

A W-2 employee:

  • Work hours are set by the company and usually consist of a fixed schedule.
  • The work process is defined by the company and training is provided to workers by the company.
  • The workload is assigned by a supervisor and workers are required to meet set criteria for performance.
  • Equipment, tools, and supplies required to perform the tasks are provided by the company.
  • Workers have a single employer.

A 1099 contractor:

  • Work schedule is determined by the worker.
  • Assignments are accepted on a case-by-case basis and the worker can reject or opt out of assignments.
  • Workers complete assignments using their own methods and work process.
  • Tools, equipment, and supplies are provided by the worker although the company may provide some training.
  • Workers may provide their services to other clients.

Understand Workers benefits

  • 1099- you have no benefits; employers can pay contractors more because they don’t pay benefits for the employee. This includes health insurance and paid time off and vacations.
  • W-2 – Full health, 401(k), and other employee benefits

Legal (Worker Misclassification)

  • If you sent a 1099 instead of a W2 because of misclassification, you can face a $100 fine per worker.
  • You can be charged your share of FICA that you should have paid, plus 40% of the FICA your worker should have paid.
  • You can be charged 1.5% plus interest of worker wages that you failed to withhold federal income taxes for.
  • There may be similar consequences from state agencies for failure to pay or withhold unemployment taxes.
  • All of these can be backdated for up to three years per worker.
  • Workers that were misclassified can come back after you for unpaid overtime and other benefits.
  • Misclassification lawsuits (such as the epic Microsoft fiasco) can result in additional damages.

Companies that are most affected by this

  • Construction and staffing industries are rife with misclassification, but it’s a common tactic in play in all employment sectors

Disclaimer: Our firm provides the information in this blog for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. 

INSIGHT WRITTEN BY:
Denise Perchall