Disclaimer: All information provided by this post is for informational purposes only. This is a high-level overview of tax classifications of employees. TwentyPine does not provide tax or legal advice. We encourage you to find legal counsel for how this directly impacts your business before taking any action.
The difference between a 1099 and W2 tax classification can be confusing for both employers and employees. However, regardless of if your role is as a hiring manager or the person executing on the project, everyone involved needs to understand both sides of the classification. If you don’t, you can expect to be surprised come tax season as there are tax and legal implications for either party if you don’t nail this the first time around (I know…yikes.)
What 1099 Means for Employers
Hiring a 1099 employee can have a lot of benefits for your company. Not only is the necessary work being completed, but you avoid a lot of administrative overhead and costs associated with a full-time hire.
1099 workers handle all their own taxes, and you will not have to provide benefits. Plus, since the contracts usually have a time limit, as an employer you can easily bring people on and let them go as needed for a particular project. This benefit is particularly useful for specialized positions, such as a Salesforce Developer or Administrator.
Something to be mindful of as an employer of independent contractors is that they can work for multiple companies at once, and usually do. They also have the right to set their own hours, use their own equipment/resources, and control their method of work which can sometimes hinder the project timelines and add unwanted risk.
Be sure that the contract in place between you and a contractor includes a strictly defined scope of the project they were hired for, the duration of the engagement, and any other terms of business agreed upon.
What W2 Means for Employers
If you classify someone as a W2 employee they are your traditional wage workers. This means you’re responsible for handling their paperwork, paying the cost of hiring them, workplace compensation insurance, half of their Social Security and Medicare taxes, plus the costs of your benefits package. In addition, you also handle all of the equipment or software they need to do their job properly and you are in charge of their training.
The primary advantage of W2 employees for your business is having your key staff members dedicated to your organization. They usually only work for you, so you’re not competing for their time or output like you may be with 1099 contractors.
Many organizations benefit from a mix of W2 and 1099 employees depending on the work that needs to be done. You may even need part-time consulting, for example, from a Salesforce Administrator you need to help build new dashboards and reporting, but do not necessarily want some of the risks that come with an independent contractor. In this case, you have the option partner with TwentyPine and we can provide talent from our bench of Salesforce Administrators, that are W2 employees of our company.
The Importance of Classification for Employers
The implications of misclassifying workers can lead to a lot of tax trouble for your organization, so it’s important to know all the characteristics of an independent contractor. Believe it or not, a lot of the classification depends largely on the actual scope of the work being completed.
At the end of the day it is not up to you, or that potential employee, and it comes down to the law. So, if you are not sure of what an employee should be classified as reach out to an employment lawyer, and check out the following resources:
W2 vs 1099, an IRS Checklist(PDF)
Independent Contractor or Employee
Outreach & Compliance by State, USDL
Fair Labor Standards Act Advisor, USDL
What 1099 Means for Employees
As a 1099 employee, you are an independent contractor. Your income is typically tied directly to your efforts, whether that’s through a flat per-project rate or hourly fee. The biggest difference as a 1099 employee is that you have full responsibility for your Social Security and Medicare taxes. You’re also responsible for paying taxes on a quarterly basis, rather than a yearly one, and you generally don’t receive benefits.
Some of the benefits of being an independent contractor are that you may work with multiple clients, charge fees based on the complexity of the project and receive the full profit from your work. While your tax bill may appear to get a lot larger when you operate as a self-employed person, it’s balanced out by a large number of deductions that you’re now eligible to take. Careful though! Meticulous record keeping is necessary to fully benefit from this aspect of being an independent contractor.
It is also equally on you and the employer to have a contract that clearly defines the nature of your work.
What W2 Means for Employees
Being a W2 employee means that you have a traditional job where you’re hired directly by the company and you earn a set salary or hourly wage. Your employer pays half of your Social Security and Medicare taxes, and you fill out the 1040 form when you file your income taxes.
You typically don’t have the expenses that you need to deduct, as your employer should provide the supplies you need to do your job properly. In some cases, it may make sense to itemize your deductions, but this is a rare situation for W2 workers.
While you have less to worry about with taxes, as it gets taken out of your paycheck automatically, you do have a lot less flexibility. If you’re a full-time worker, you generally only work with a single company, within their set hours and within their terms of business.
However, the obvious benefits of being W2 are the benefits your company will offer, which often includes everything from health insurance and retirement plans to things like Summer Fridays, and great culture.
The Importance of Classification for Employees
It is super important to note that receiving a 1099 does not automatically make you an independent contractor. It is equally important that if you are an independent contractor, you know what tax reporting and record keeping is required on your part to stay compliant.
If you have questions about how to classify yourself, be sure to seek advice from an employment lawyer or accountant. The following resources can also help break it down:
Fair Labor Standards Act Advisor, USDL
IRS Definition of Independent Contractors
For more information, all classifications see the below infographic. This month we will be continuing to provide information on both hiring contract employees, and how to take advantage of those opportunities. Be sure to subscribe to our blog below!