Not all employees are the same—not in terms of their personalities, but rather their classifications! You may be used to working with full- or part-time employees (W-2), or maybe even interns. But you might not realize that there’s a chance you work with 1099 employees as well—better known as independent contractors.
By definition, a 1099 employee is an independent contractor who provides a service to a company but is not an official employee of that company. In other words, these individuals are self-employed, non-payroll workers.
Gig workers, freelance writers, and some temp workers are the most common 1099 employees.
So, what really separates a 1099 employee from a W-2 employee?
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Degree of Control
The Internal Revenue Service (IRS) says there are three categories that provide evidence of the degree of control and independence of an employer/employee relationship: behavioral, financial, and type of relationship.
Behavioral: Does the company possess the right to control what the worker does and how the worker does his or her job?
- If not, the worker is most likely a 1099 independent contractor.
Financial: Are the business aspects of the worker’s job controlled by the payer? Simply put, does the employer decide how the worker gets paid, when they get paid, and whether expenses are reimbursed?
- An independent contractor will typically set the guidelines for their rendered services.
Type of relationship: Can the worker receive any company-sponsored benefits, is the relationship continuous, and is work performed a key aspect of the business?
- This can be a bit tricky. 1099 employees don’t usually receive any benefits from the company but can be provided with incentives if the company chooses. As for the length of the relationship, that’s determined based on an agreement between the worker and the employer.
A worker who is classified as a W-2 employee has a long list of legal protections…a 1099 employee has protections as well, but not nearly as many. For example, an independent contractor is not entitled to traditional benefits like vacation days, sick days, or health insurance. They are also not guaranteed minimum wage.
Furthermore, business owners don’t have the same tax obligations for 1099 employees as they do with W-2 employees. Independent contractors are responsible for paying their own taxes, which means business owners don’t need to be concerned with withholding taxes or paying payroll taxes for their 1099 employees. However, if a contractor is paid more than $600 by an organization, that organization will have to submit a 1099-NEC form.
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Don’t Misclassify Your Workers!
The reason it’s so important to know the difference between a 1099 and a W-2 employee is because misclassifying them can be a costly mistake.
A misclassified worker can result in liability for employee-related costs. Fines and backpay costs may include a $50 fine for each W-2 not filed, 1.5% of an employee’s wages plus interest, 40% of an employee’s Federal Insurance Contributions Act (FICA) tax contributions, and the full employer-matching FICA contributions.
Additional penalties can be handed out by the Department of Labor (DoL) if they believe misclassification was intentional. These penalties include 20% of all employee wages paid, all employee and employer FICA contributions, up to a $1,000 criminal penalty fee for each misclassified employee, and up to one year in prison.
While this may seem intimidating, there’s nothing you have to worry about if you have VensureHR as your professional employer organization (PEO) partner. Our payroll and tax experts will handle all of your filing to assure all of your employees and contractors are classified properly. Schedule a free diagnostic today to get started.