While good help may be hard to find, if you cannot determine what type of help your business will need, then it can be difficult to classify the type of worker you need and determine how you will pay them. Even if you have a payroll service or accountant doing the heavy lifting when it comes to paying them; it is crucial for your business to know how each affects you on how they are taxed and what legal level of control you have with them.
To hire an independent contractor or employee seems like a simple question, however, trying to figure out the difference between them and when to use 1099s and W-2s can be confusing and overwhelming. Simply stated, 1099s and W-2s are two separate tax forms for two different types of workers; an independent contractor will receive from you a 1099 form and a hired employee/staff will receive a W-2.
If the person sets their own schedule, accepts task on a case-by-case basis-and can turn down offers of work, supplies their own tools/equipment, and has more than one client; they are an independent contractor. Unlike contractors, employees have relatively little control over their own work, nevertheless, they generally have stability and benefits, one of the most important being health care. This is important to consider for your business, as the overhead cost associated with W-2 include payroll, employer taxes, other benefits, additional office space and equipment, etc.
Establishing who will foster “control” of the behavior, financial, and type of relationship of the work that is to be performed will determine the federal classification. For instance, if the position requires assigned hours or set schedule, requires training laid out by your company’s standards, complete any and all work assigned by a manager, and you are the sole employer; then this person is classified by the IRS as a W-2 employee.
Common 1099 and W-2 Rules
The IRS has developed guidelines and common law rules to assist business owners in their decision when hiring workers. It is very important to make sure that you are classifying your workers correctly since misclassification can result in costly financial penalties and fines.
If you misclassify an employee, you are disserving them from accessing critical benefits and protections that they are entitled to by law, such as unemployment insurance and other taxes, worker’s compensation, minimum wage, family and medical leave, and a safe workplace. If found misclassifying employees as independent contractors, you will likely have to repay all of those taxes and benefits. Employee misclassification is just not an injustice to your employees, but also to your business, state and federal government.
The key to hiring help is to look at the entire relationship and degree or extent of the right of control that will be garnered when determining hires. Before making a final decision contact one of our trusted CPA or tax professional to help guide your business into the right direction.