Do you know what the difference is between a W-2 employee and a 1099 contractor?
A lot of business owners get confused on this one (and so does the IRS!) so let’s take a second to help clarify some of the differences (especially because there’s financial penalties if you get this one wrong!)
Here’s a few ways to help tell the difference:
A W-2 employee:
– Is in an employment agreement with you– You provide their equipment and pay for their training– You withhold payroll taxes from their earnings– Is more likely to have employee-type benefits (like insurance, vacation, 401K, etc)
A 1099 contractor:
– Is self-employed and performs the work on their schedule– Provides and uses their own equipment– Pays their own taxes + benefits
But the line here blurs more often than you may think, especially for long-term relationships. So much so that, like I said earlier, even the IRS doesn’t have a hard and fast line they can draw for it! There is no hard “rule” which can make it difficult for owners to decide classification.
However, the IRS generally looks at three elements:
1 – BEHAVIORAL: Do you, as the, business, have the right to control how and when they work?
2 – FINANCIAL: Who controls the worker’s salary, and pays for their training and supplies?
3 – TYPE OF RELATIONSHIP: Is there a written contract? Is the relationship ongoing? Are there employee-type benefits?
If you’re still unsure how to classify one or more of your workers, it’s probably a good idea to seek out more counsel from a tax professional … but when in doubt, it’s wiser to default to W-2. If you incorrectly choose 1099, you could be paying hefty fine and back taxes in the future if the IRS disagrees!
There’s more helpful details and links in the below article, as well.
And, of course, if we can ever help you with questions like this, just drop a comment below and let us know!
We are here to help!
Kerry Postel – Founder CEO Principal
Abacus Business Solutions
Has Higher National Diploma in Business and Finance, Certified in QuickBooks, Member of American Institute of Bookkeepers, and over 20 years of bookkeeping experience including construction, travel, restaurants, events management, and other various professional services.
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