These forms — typically issued to freelancers and independent contractors — report wages without taxes withheld, such as Medicare and Social Security, to the IRS. Both W-2s and 1099s are necessary because the information on these forms is used to report important data about earnings to the appropriate government agencies. For an employee, they need a W-2 to accurately file federal and state taxes. For an independent contractor, information on a 1099 helps them report income to the IRS and determine appropriate tax liability. A W-2 is a separate form from a 1099, the primary difference being that the W-2 is issued to employees on the company payroll, whereas a 1099 is given to independent contractors and other non-payroll workers.
- Suppose you need legal or accounting advice or professional assistance to address your specific facts, circumstances, and business needs.
- A 1099 worker is typically less expensive than a W-2 employee and ready to immediately accomplish a task without any extra training.
- 1099 and W-2 forms are both common small business tax forms, but the differences include who receives the form and how they get handled regarding tax rates and practices.
- For guidance or advice specific to your business, you should consult with a tax or legal professional.
- Make sure that your company’s workforce is your competitive advantage.
An employee may be full-time or part-time, be paid hourly or with an annual salary and, especially in the case of part-time work, may have more than one employer. An employee works for someone who controls their work schedule, where and how they do their work, and what they do each day. Their employer directs not only the work product, but how it should be done.
The IRS Test to Determine Independent Contractor Status
At tax time, as discussed earlier, you’ll need to give employees a W-2 that shows the amount of these taxes that were withheld from their pay. However, you don’t have to pay for benefits or Social Security, Medicare, or unemployment taxes when you hire a contractor. Because of that, many businesses find independent contractors to be more cost efficient. However, if you need employees for a longer period of time and need them to be at a specific job at a specific time doing work according to company procedures, you need to hire W-2 employees. However, doing everything by the book can help you avoid costly lawsuits or tax penalties that can severely impact your business. By determining the needs of your business first, you can better decide whether to hire 1099 or W-2 employees — or maybe even a combination of both.
Since there’s not a definitive way to determine if a worker is W2 vs 1099, it’s important to consider the whole relationship and how much you direct their activities. You must make sure to document these factors when determining whether an employee should be classified with a W2 or 1099. It can also be much easier to terminate a relationship with a contractor or freelancer than with an employee, and contracts can be tweaked or changed from one period to another, suiting employer needs.
Your Independent Contractor Hiring Options
This website provides articles that are intended to be informative and educational. AccuServe Payroll is not responsible for the accuracy of any information provided on these pages. AccuServe Payroll does not necessarily agree with or support any of the views stated in the materials. Suppose you need legal or accounting advice or professional assistance to address your specific facts, circumstances, and business needs. In that case, you should consult a licensed attorney, accountant, or other tax specialists. It is not always cut and dry when verifying the difference between these two groups.
Taxes are more complicated for self-employed people, as they often have to make quarterly estimated tax payments throughout the year. If you're confused by tax forms and get your 1099s mixed up with your W2, read on. Merchant Maverick’s ratings are editorial in nature, and are not aggregated from user reviews. Each staff reviewer at Merchant Maverick is a subject matter expert with experience researching, testing, and evaluating small business software and services. The rating of this company or service is based on the author’s expert opinion and analysis of the product, and assessed and seconded by another subject matter expert on staff before publication.
How to figure out who you should hire
They decide what tools and methods they use to complete the work and can even hire their own workers to help them deliver it. With this in mind, 1099 contractors need to make a minimum of 7.65% more per hour to cover the employer's share of Social Security and Medicare https://www.apzomedia.com/bookkeeping-startups-perfect-way-boost-financial-planning/ taxes. Both Forms W-2 and 1099 must be furnished to the service provider by January 31 of the year following the year of payment (e.g., January 31, 2023 for wages/compensation paid in 2022). In some situations, the same person can receive both a 1099 and a W-2.
If you answered "yes" to these questions then you are probably self-employed and considered a 1099 employee by the IRS and the businesses that hire your services. As a worker or employer, it's important to know what kind of worker you or your employees are. Freelance work and contracting bookkeeping for startups work can also be less dependable with pay and hours. You are in charge of finding your own clients and selling your services to them. Because W2 employees are not their own business owners, they are subject to the demands, needs, and work structure of their employer.