From business.com, Andrew Martins discusses the differences between an employee and independent contractor and the importance of classifying workers properly. Interestingly, the title, “Do Your Employees Require a 1099 or W-2?”, is somewhat misleading because if they are your “employees” then they must receive a W-2. Andrew writes:
What’s the difference between a 1099 and W-2?
With every dollar you (and your employees) make, a certain percentage goes not just to the federal government, but to local and state jurisdictions as well. As those taxes are taken out of a person’s pay, whether it’s through automatic tax withholding by the business owner or estimated quarterly payments made by the individual, those funds go toward Social Security, Medicare and unemployment.
When you hire workers, you must determine their classification – either as an employee within your company or an independent contractor – as you will be required to file either IRS Form W-2 or IRS Form 1099-MISC for them. The difference may not seem paramount, but Mark W. Everson, vice chairman of alliantgroup and former IRS commissioner appointed by President George W. Bush, emphasizes its importance for small businesses in particular.
“The rules concerning employee and independent contractor classifications are complex and frequently debated at both the federal and state levels,” Everson said. “It’s extremely important to understand the legal and tax obligations associated with each classification and how closely they coincide with one another.”
According to the National Conference of State Legislatures, the standard for whether someone is an employee hinges on whether the employer “has the right to control the work, the worker is an employee, not an independent contractor” or the employer can “exercise behavioral and financial control over the worker.”
If you’re hiring someone as a full-fledged employee of the company, you must file a W-2. For each independent contractor under your employ, you must file a 1099.
For employers who are unsure about a classification, Everson said a CPA or legal advisor, whether in-house or hired temporarily, can help with the decision-making process.
Read the full story at Do Your Employees Require a 1099 or W-2? – business.com