The Difference Between a Contractor (1099) or Employee (W2)
A business has a choice to pay an independent contractor and an employee for the same type of work, but there are important legal differences between each.
The IRS is very clear on the matter, and most states are usually even stricter. At any time, the Department of Labor in your state can request an audit of your books for just this, and they are very particular.
To determine if a person is an employee of an independent contractor, ask yourself the following:
Does your company control or dictate the individuals’ hours or how the individual does the job?
Is there a written contract or employee benefits such as a pension plan, insurance or vacation pay?
Does the individual use their own equipment or supplies?
So, what is the difference? Here are a few of the basics:
A contractor does not work according to your schedule, they are not your typical 9-5'ers, nor do they belong on a weekly or bi-weekly scheduling sheet. These are people that you hire to perform a job, not work specific shifts. Their deadlines are often implied or agreed upon before starting. Contractors typically have autonomy and flexibility and do not receive benefits, such as health insurance or paid time off.
A contractor should have an established business presence, and/or other clients that they perform the same types of 'jobs' for, (for instance, we do Accounting for multiple clients, not just you). An established business presence is dictated by examples such as the following: a website, business cards, print or other advertising media, etc.
A contractor uses their own tools, supplies, and equipment. An employee is provided the tools and equipment to do their job. This can be a bit sticky but is used as a determining factor.
Employees are on a company’s payroll and received wages and benefits in exchange for the work they perform. Typically, employees have a set schedule and specific employer guidelines to follow.
Independent contractors are issued a 1099 at the end of the year and employees are issued a W2, where they have taxes withheld from their pay.
Additionally for independent contractors:
All independent contractors and unincorporated businesses should be issued 1099's, as well as all attorneys regardless of business structure. (Provided they meet the minimums for the year).
You should also be issuing 1099's for all commercial rents paid and interest paid.
Hiring a contract worker rather than an employee could save your business money; after all you will not have to offer or pay for their health insurance, 401(k) matches, provide PTO and you will not incur employer payroll tax expenses. However, choosing this option also comes with limitations and potential risks. Before you decide which type of worker to use for a given role, it is important to understand the difference between contractors and employees and the consequences for misclassifying them.
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