Properly classifying employees and knowing the steps for switching employees from W2 to 1099 workers will help ensure that you correctly complete the transfer.
W2 and 1099 employees are different, but not everyone knows that distinction.
Employers must file the right tax forms and payroll taxes for each type of employee. You can reference this post for a summary of the differences between a W2 and 1099 worker and for guidance on switching between the two.
If you hire both kinds of employees, your tax software should meet your personnel needs. Our W2/1099 Forms Filer and add-on AMS Payroll module can help users manage payroll and tax season preparations.
What is the Difference Between a W2 and a 1099?
The IRS distinguishes a W2 employee from a 1099 independent contractor by reviewing a worker and employer’s:
- Behavioral relationship
- Financial relationship
- Type of relationship and its longevity
Employers use a W2 form to report the income for their employees and withhold a set amount of income from their employees’ pay to cover employment taxes. A W2 form reports the:
- Employee’s income
- Withheld income
Employers file a Form 1099-NEC for their independent contractors. According to data that was collected in late 2024, there were 11.9 million people categorized in July 2023 as independent contractors. The U.S. Bureau of Labor Statistics found that these workers represented 7.4% of total employment.
Independent contractors pay their own self-employment taxes. Employers only report what they paid to a contractor on a 1099 form if they compensated their services in the amount of $600 or more during the year.
When Would Employees Switch from W2 to 1099?
Employers may switch their W2 employees to 1099 contractors for two main reasons:
- The employer needs to downsize
- The role of the work has changed
There are other reasons for switching employees from W2 to 1099, but these two reasons capture the majority of switches. Employers may need to:
- Remove some workers from their payroll but still want to contract the work that they need for the business
- Reduce the frequency of the work and only hire a contractor for specific jobs
How to Complete Switching Employees from W2 to 1099
The following steps outline the basic parts of the switching process, which can vary depending on the specific situation.
- Identify which employee needs to switch and for what reason.
- Notify the employee of the switch.
- Terminate the employee in accordance with federal law.
- Hire the worker as an independent contractor.
- Remove the worker from your payroll.
- File a 1099 for tax reporting for the new independent contractor.
Frequently Asked Questions
- Is it risky to switch a W2 employee to a 1099 worker? – It can be. The IRS may perceive it as a red flag if you send both a W-2 form and a 1099 form to the same employee in the same tax year.
- Which tax form should I use for temporary employees? – Keep in mind that temporary workers at an agency are not self-employed. Therefore, they will not be viewed by the IRS as contractors. It is still worthwhile to get software that handles multiple forms.
AMS Software Can Help Process W2 and 1099 Employees
Switching employees from W2 to 1099 can be complicated. AMS Payroll and W2/1099 Forms Filer can help simplify the steps. Use AMS software tools to easily navigate changes to payroll and year-end tax filing. The software offers:
- An easy-to-use, menu-driven format
- Automation to populate the forms with information that you save
Download our free 1099-etc Demo software today and buy your preferred AMS software system through our website.
Small businesses can experience adjustments to their workforce. You may find you suddenly benefit from a software that is able to process those changes. AMS software takes a modular approach, so you can add features like e-filing to customize your payroll and tax software.
Call our Sales and Information Team at (800) 536-1099 with any questions.