Form 1099 vs Form W-2: Is your Worker an Employee or a Contractor?

The tax season is in its full glory. Some might be feeling light-headed after feeling all their forms, but there are some who are yet to understand how Form 1099 vs Form W-2 stands.

The Form 1099 and Form W-2 has confused many employers when it comes to telling the employees and independent contractors apart. In these economic times, many businesses are trying to cut back the expenses by hiring independent contractors instead of getting full-time employees. As a result, it often gets dificult for these businesses to categorize employees and contractors apart.

But the main problem is that there are some significant diferences between an employee and an independent contractor in terms of their work and in the eyes of IRS.

If you are finding it dificult to diferentiate between the two designations, then this article will give you a better understanding of the nuances between the two.

Breaking down the Diferences

In simple words, the Form 1099 and the Form W-2 are two separate tax forms for two diferent types of workers.

If you are an employee, then taxes will be taken out. You’ll receive an IRS Form W-2 in January. On the other hand, if you are an independent contractor then you will receive an IRS Form 1099 if your total pay was $600 dollar or more in that tax year.

For a Form W-2 employee, the payroll taxes are automatically deducted from the paycheck and paid to the govt. through the employer. In contrast, independent contractors get full pay without any deduction. The independent contractors are liable for their own taxes. They have to calculate and submit their payroll taxes to the govt. on a quarterly basis.

Another issue that occurs is that some employers try to pose their workers as contractors. The IRS has been tracking down these types of businesses and has collected $9.5 million as back wages since 2011.

Same is the case with the employees posing as independent contractors in lieu of getting a bigger check. What they don’t get is that this way they will actually owe the govt. higher taxes.

An independent contractor owes income tax as well as the self-employment tax. On any income with value $113,700 or less the rate is 15.3% and beyond this value is 2.9%. But if you are an employee, the social security tax gets half i.e. 7.65%!

How to Determine the Correct Job Status?

When it comes to classifying the workers correctly, the key factor should be the “Control”. By control, it means who holds the power over the work done by the worker.

Compared to the employees, the contractors have more control on their work. But the employees get more stability and benefits such as healthcare.

If you have a worker as an employee, then the employee should

  • Have only one
  • Have assigned hours or a particular set of schedule.
  • Get trained by the company in a certain way.
  • Should complete any and all the work assigned to them.
  • Should be provided the tools and materials necessary to finish the assigned work.

If your worker is an independent contractor, then they should:

  • Have more than one
  • Have a set of own schedule.
  • Use their own personal method to finish the assignments.
  • Have a supply of own tools.
  • Have the freedom to accept and turn down offers.