If you have landed here, you are probably considering reducing the number of full-time employees (W2) and hiring self-employed independent contractors (1099) to perform specific jobs. There are significant differences in how these two types of workers are classified with the Internal Revenue Service (IRS). Knowing these differences is crucial if you want to avoid hefty fines, tax penalties, and even a lawsuit against your North Carolina business.
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A W2 employee is someone who you recruit and add to your payroll — your typical, salaried employee. The litmus test used by the IRS to determine whether someone is a W2 employee is when the business controls what work is done and how it is done. The company manages the specific details of how the job is done even if the employee enjoys considerable autonomy in doing their job.
According to IRS regulations for W2 employees, you must withhold income taxes from the employee’s paycheck and provide them with a minimum wage and other benefits such as health insurance, overtime pay, unemployment insurance, and workers’ compensation insurance. You must also provide W2 statements to employees at the end of each year and report their earnings to the IRS.
1099 contractors are independent contractors hired to perform specific tasks outlined in a written agreement. While businesses can control or direct the results of their work, they have no control over what is done to deliver the results or how the job is done.
You are not required to withhold taxes from the contractor’s check or pay payroll taxes in most cases, though you must provide them with a Form 1099-MISC, which they will use to report their earnings. According to 1099 employment rules, an independent contractor is not entitled to minimum wage, health insurance, paid time off, and overtime. They are not also covered by workers’ compensation or unemployment benefits.
With a W2 employee, you make all the decisions. You decide how they work, when they work, what they can (and cannot) do, what level of performance is acceptable, and how much they will be paid. A W2 employee may work in your office, using a desk and computer provided by you, and be assigned to a fixed shift. They work for your business on an ongoing basis, and you have complete control over how they carry out their responsibilities.
1099 workers, on the other hand, make their own decisions. They have complete control over how the work is done and how much they are paid. They are responsible for outcomes rather than processes. A plumber or electrician you hire to deal with an issue at your business is an example of a 1099 worker. You tell them what you want done but rely on their experience and expertise to get the work done right.
As an employer, you bear the responsibility of deciding how to classify workers. Unless they meet the stringent standards for being an independent contractor, they are presumed to be employees under the law.
The IRS will consider the degree of control and independence in the following categories when deciding whether someone is a W2 employee or 1099 employee:
The level of control a business has over its workers is what the employee classification process ultimately comes down to. If you control the majority of a worker’s job, they are most certainly a W2 employee. If they have a high level of autonomy, they are probably a 1099 worker.
If you are still unsure whether someone is a W2 employee or a 1099 worker, you can seek clarification from the IRS. There is a form for it (Form SS-8), but it can take up to six months to get a determination.
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