And just like that, tax season is upon us. It’s that time of the year when everybody gets to participate in the highs and lows of filing—although, for most of us, it’s mostly lows. Tax season can be a stressful time for everyone. From having to compile a year’s worth of information to ensuring everything gets done in a timely manner, there seem to be an endless number of roadblocks and obstacles to ensuring your tax filing goes as smoothly as possible. Whether you’re a business owner, a CPA, or someone somewhere in the middle, tax season probably isn’t the time of year you’re looking forward to most.
And we get it. At Payday HCM, we’ve not only had numerous potential clients come to us with these exact worries and stressors, but we also have to leap through the same hurdles that most businesses face. Without our talented team and years of industry experience, we might be lost when it comes to understanding something like W-2s and 1099 forms. When it comes to your employees, how should you know which one they should get?
In this article, we’ll go over the key differences between an employee who receives a W-2 and one who receives a 1099. We’ll look at the different classifications that will help you determine which form your employees will receive. We’ll analyze the differences between the two classifications when it comes to taxes and the different methods for identifying each type of employee. By the end of this article, tax season will feel more like relax season.
In this article, you will learn:
- Does My Employee Get A W-2 or 1099 Form?
- Key Differences Between W-2 and 1099 Employees
- Identifying Which Form To Give To Your Employee
Does My Employee Get A W-2 or 1099 Form?
Firstly, we’ll start by looking at the general definitions for both a W-2 and 1099 form, and these will help you determine which to provide to whom.
W-2 Employees
The IRS uses a couple of ways to determine whether an employee will receive a W-2 form or not. Any business that paid an employee $600 or more where where income, Social Security, and Medicare tax was withheld must provide said employee with a W-2 form.
Generally, an employee who receives a W-2 will be one who’s hired on in a more permanent capacity—whether it be part time or full time—and who performs ongoing work with federal and state taxes being withheld from their checks. These include hourly and salaried employees.
1099 Workers
A 1099 form is somewhat more broad. A 1099 form must be provided to any person for that you paid more than $600 for “a notional principal contract to an individual, partnership, or estate,” according to the IRS.
So, those receiving 1099 forms aren’t really employees—they are more likely independent workers or contractors whom your business hired to perform some sort of service. This can include consultants, gig workers, contractors, and other vendors.
Key Differences Between W-2 and 1099 Employees
Now that we have outlined the definitions for W-2 and 1099 employees, we can get into more detail about the key differences between the two.
Employees vs. Independent Workers
The biggest difference between those who will receive a W-2 and those who will receive a 1099 is whether they are hired employees or not. As stated above, those receiving a W-2 are employees hired on for an indefinite amount of time to perform some amount of work, either part or full-time. Those receiving a 1099 are hired independently and run their own business operations.
As such, those receiving a 1099 are not subject to the same legal regulations or protections that W-2 employees are. 1099 workers are also not typically eligible for benefits, whereas W-2 employees are.
Tax Obligations
When looking at the tax obligations for W-2 and 1099 employees, there are also some key differences. For W-2 employees, you are required to withhold all state and federal taxes and pay your share of unemployment, Social Security, and Medicare taxes as well.
For 1099 workers, though, this does not apply. Since 1099 workers are independent of your business, you aren’t required to withhold any taxes. Those withholdings and tax obligations are up to the individual receiving the 1099 to settle.
Identifying Which Form To Give To Your Employee
With a better understanding of what a W-2 employee is compared to a 1099 worker as well as the key differences between the two, we can begin to look at how you can actually identify these two types of workers.
Testing For Employee Classification
There are a variety of different methods for determining which classification an employee or worker may fall under. The IRS has a list of common law rules that allow you to make a determination on classification based on factors such as behavioral, financial, and the type of relationship. They judge these things based on the degree of control a business has over said aspects.
The U.S. Department of Labor and U.S. Equal Employment Opportunity Commission also have their own test and guidelines to determine classification. The Department of Labor’s Economic Reality Test includes metrics like permanence of relationship and opportunity for profit and loss, whereas the EEOC’s guidelines are largely based on what rights or facilities a worker or employee has access to.
Misclassification Penalties
Misclassifying an employee can have far-reaching consequences for a business. Firstly, there’s the issue of unpaid taxes: if an employee is wrongly classified as an independent contractor instead of an employee, a business will be liable to pay any federal or state taxes that were not paid due to the misclassification.
Secondly, there is the issue of rights afforded by the Fair Labor Standards Act. If an employee is misclassified as an independent contractor, an employer can be fined for not upholding the overtime or minimum wage rules as outlined in the FLSA. A pattern in behavior could result in criminal charges.
Make Tax Season Stress-Free With Correct Classifications
Tax season can be a stressful time for individuals and business owners alike. Not only is there the stress of having to ensure all of your businesses taxes are taken care of, you also need to ensure that all of your W-2 and 1099 forms are going out to the correct people. If done incorrectly, this can be a costly and time-consuming process. With the information provided in this article, though, you’ll have what you need to ensure all of your classifications are in check and everyone receives what they are supposed to receive.
Now, the forms are one thing, but what taxes you’ll actually be paying is another. Take a look at our article on employer taxes to get a refresher on everything you’ll need to pay heading into next year.
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