Misclassifying your contingent workforce can lead to severe regulatory and financial penalties, not to mention the impact on your company's brand and social value. In our experience, one of the common pitfalls our clients fall into is engaging a 1099 independent contractor when the circumstances dictate that they really should be treated like a W-2 contractor.
So, what is the difference?
The main differences between a W-2 contractor (employee) and a 1099 independent contractor (IC) are as follows:
Tax Withholding
- W-2 Contract Employee: Taxes, including income tax and payroll taxes (Social Security and Medicare), are withheld by the employer, and paid on behalf of the contract employee.
- 1099 Independent Contractor: No taxes are withheld by the client or payer. The independent contractor is responsible for paying both income tax and self-employment taxes.
Contract Employee Benefits
- W-2 Contractor Employee: May be eligible for employee benefits such as health insurance, retirement plans, and paid time off provided by the employer.
- 1099 Independent Contractor: Typically, not eligible for employee benefits from the client or payer. They are responsible for their own benefits and insurance.
Control and Independence
- W-2 Contract Employee: Typically, subject to more direct control and oversight by the employer regarding work hours, tasks, and how the work is performed.
- 1099 Independent Contractor: Generally, has more independence and control over how they perform their work, including the methods and hours worked.
Employment Rights
- W-2 Contract Employee: Has certain employment rights and protections, such as minimum wage, overtime pay, and access to unemployment benefits.
- 1099 Independent Contractor: Generally, does not have the same employment rights and protections as a contract employee.
Tax Forms
- W-2 Contract Employee: Receives a W-2 form from the employer at the end of the year, detailing their earnings and withheld taxes.
- 1099 Independent Contractor: Receives a 1099-NEC or 1099-MISC form from clients or payers, reporting their earnings, but no taxes are withheld.
Business Expenses & Timesheets
- W-2 Contractor: Typically, not responsible for business-related expenses; these are covered or reimbursed by the employer. Timesheets are completed and authorized by the employer’s direct report for payment by the agency.
- 1099 Independent Contractor: Responsible for their own business expenses, which can be deductible for tax purposes. They are paid on invoices for time and materials but on timesheet hours.
It's important for both clients and workers to correctly classify their working relationship, as misclassification can lead to tax issues and potential legal consequences. The determination of whether someone is a W-2 Contract Employee, or a 1099 Independent Contractor depends on various factors, including the level of control, the nature of the work, and the legal agreements in place.
We have created the TRS WFS Risk Calculator to quickly identify and audit the potential risk value of your 1099 independent Contractor workforce. Complete the form below and we will be in touch with your results.