Towards the end of the financial year, employers must issue their employees W2s and 1099s, the different tax forms used to deduct payroll taxes. However, how to distinguish which forms are to be issued for whom? Trying to figure out when to use 1099s and W2s can be confusing and overwhelming but it’s vital that we have an elementary understanding of how to classify workers.
1099 vs. W2: Employees and Independent Contractor
Self-employed are independent contractors that are classified as 1099 employees while a W2 employee receives a regular wage and employee benefits. Contractors are flexible to set their own hours and use their own tools and maybe working for more than one business. Since they are self-employed, employers cannot withhold taxes from their paychecks and in fact, these contractors pay their own taxes. On the other hand, an employee is hired by an employer under an employment agreement who holds the right to withhold taxes from the employee’s wages, train them, pay employment taxes for them, and may provide benefits such as health insurance and afterlife benefits. And hence their work type and work hours are completely controlled by their employers.
Contractors and Employees
There lies a fine line between 1099 and W2 workers but to understand this classification better let us look at how IRS (Internal Revenue Service) classifies workers. In order to determine the degree of dependency or control between employee and employer we need to ponder on the below pointers:
This determines if the employer has control over how the job needs to be done, how many hours, and which hours to deploy? If yes then the worker will be classified as an employee and, if the worker need not be directed then it is a contract.
Does the employer specify the tools to be used to accomplish the business goal or are the expenses reimbursed, fixed method of payment, or any additional benefits are provided? If yes then the worker is an employee and a contractor otherwise.
Type of Relationship
Are the employee and employer bound within any specific contract and is the job period permanent, is any party legally obliged to work, is there flexibility? If any of the boxes tick yes then it is an employee and if no then a contractor.
The IRS notes that there is no set method that classifies w2 employee vs 1099. Instead one needs to do the math to determine the relationship and once it is determined it is essential for proper documentation to be maintained that leads to this determination. There will always be two sides to the same coin; with the benefits come the challenges.
Hiring Employees: Benefits and Challenges
Remember: You need a W2 tax form if you are hiring an employee.
Hiring Contractors: Benefits and Challenges
Remember: You need a 1099 tax form if you are hiring an independent contractor.
1099 vs W2
Companies are always looking at cutting down on the labor cost as labor costs consists a major part of the expenses when running a business. Irrespective of how the economy looks, employers are always looking to minimize labor charges. And one of the most cost-efficient ways to run a business y avoid this cost is by hiring 1099 independent contractors. They deliver the needed work without a longer commitment and management cost.
1099 vs w2 which is better for Employee
As we try to answer this question, we need to understand that the needs and requirements vary from person to person when looking for an income source. While some are looking for job security and a permanent position with benefits, others are looking for independent calls and not to stay longer while getting paid for the job done. As an employee, it is crucial to comprehend the distinction and know what your rights are as a worker, as well as consider the benefits and drawbacks of full-time employment vs. contractual work.
To conclude, in order to determine whether or not one agrees to work as a 1099 contractor or a W2 employee depends solely on personal skills. A contractor will have comparatively more skills than an employee as a contractor needs to brush up on their skills and be updated with the trending practices. Similarly, whether or not an employer hires a 1099 contractor or a W2 employee depends solely on the requirements and the budget of the business.