So Which One Should You Use?
The 1099 vs Employee classification is a huge topic of discussion among my clients. In this post, I will try to clarify when someone should be paid using a 1099 or a W-2.
The Factors That Go Into The Decision
There is no exact science as to how to classify someone as either an employee or independent contractor (1099). But some of the factors below are to be considered when deciding how to classify someone as independent contractor or employee:
- Behavioral – Do you have control over the person working for you? Do you provide the tools? Are you giving the worker a strict schedule of when they have to work and how? Or are you giving the worker an exact guideline to follow in order to complete the job?
- Financial – Is the worker paid by the hour? Or a one-time fee based on when a project is completed?
- Relationship – Is the worker working for themselves? Or do they only work for you? Do you provide any other sort of employee benefits like healthcare or vacation days?
Intuit provides a great tool that will help you. Check it out here.
The Differences
Being classified as an independent contractor (1099) or an employee is very important. If you are classified as an independent contractor, you will have to pay the following on the wages you earned:
- 15.3% self-employment tax
If you are classified as an employee:
- 7.65% social security tax (employer pays the other 7.65%)
- 1.45% Medicare Rate (employer pays the other 1.45%)
As you can see above, there is a huge difference. If you are paid by 1099, you are responsible for the 15.3% self-employment taxes. You can be rest assured that you will be owing money to the IRS come tax time if you are only paid by 1099s.
Now if you are paid by W-2, you will be paying less in taxes. The employer who hired you pays half of the taxes. While if you are on 1099, the employer pays nothing and you are responsible for all 15.3% percent.
If you are an employer, you can see the benefit of paying someone using a 1099 instead of a W-2. If you pay someone using a 1099, you are not responsible for any taxes. But please be careful. If when you hire someone and they should be paid by W-2, please do so. Don’t be tempted to pay someone by 1099 when it should be by W-2. The IRS has been really cracking down on this area and you can face huge penalties for miss-classifying workers.
The IRS posted a helpful page on this topic here.
If you have any further questions on this topic, please don’t hesitate to contact me.