4 Key Differences Between 1099 and W-2 Employees

Trying to figure out the differences between 1099 and W-2 employees can be intimidating, and if your company doesn’t understand the distinction, the consequences can be dire. Understanding how to properly classify your team affects how both you and they are taxed.

Let’s start with basic definitions first: 1099s and W-2s are tax forms. A 1099-MISC is typically used to report payments made to independent contractors, who cover their own employment taxes. A W-2 form is used for employees (and you, the employer, withhold payroll taxes from their earnings).

If you don’t want to deal with the hassle of withholding payroll taxes, then why not classify your entire team as 1099 workers? It’s not that simple. The Fair Labor Standards Act (the law that defines employer and employee relationships) and the IRS have guidelines that define each classification. These guidelines are primarily based on the amount of control you have and the amount of independence a worker has. While it might sound vague, here are some questions that can help you make a determination:

  • Do you want to control how the worker does their job, or are you more concerned with the end result?
  • Do you need work done on a specific project, or is the relationship more permanent?
  • Do you provide supplies, resources or expenses in order to get the work done?

It’s important to get this classification right the first time around, because as an employer, you could face stiff penalties for classifying a W-2 employee as a 1099 employee, including: repaying the cost of workers comp insurance, employer taxes owed, reimbursement for wages and/or benefits to the employee.

Consider these four key differences between 1099 and W-2 employees:

  • Independence:
    Employers can require their W-2 employees to work certain schedules and perform work responsibilities according to the organization’s preferences. If you want to exercise control over both the process and the output, it makes sense to hire a W-2 employee for the role. 
  • Resources:
    Employers typically provide the resources and materials (office supplies, office space, etc.) needed to complete the tasks of the role, which can add to overhead costs when hiring a W-2 employee. 
  • Expertise and insight:
    Typically, 1099 independent contractors are hired for their laser-focused expertise. They should be able to hit the ground running and do not require extensive training. 
  • Length of relationship:
    Generally speaking, employers are able to dismiss employees at-will (check your local employment laws – county, city, and state – to confirm). However, independent contractors have to be terminated per the terms of the contract, usually with advance notice. Some may require mediation or arbitration, so make sure to negotiate the terms and conditions carefully prior to signing a contractor agreement. 
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