Employers must classify each worker as 1099 vs payroll, but what does this classification mean? A discussion of 1099 vs payroll highlights the specific tax filing the employer and worker will complete. This is based on whether the worker is classified as a contractor or a payrolled employee.
The distinction between contractors and payrolled employees lies in how much control the employer has over the worker’s working conditions. There is not a set formula to determine employee classification. The IRS provides some guidelines for how to assess the level of employer control, and, subsequently, the worker’s classification. As an employer, you should assess the working relationship based on its behavioral and financial implications, as well what kind, or type, of relationship it is.
This classification ultimately decides whether the worker will receive a 1099 form or W-2 form, and whether they will be on the payroll. Misclassification can result in legal fees, fines, or lawsuits.
Employee Classification Scenarios
Sometimes the employee classification process is unclear. Let’s run through some common scenarios that might require further clarification to determine if a worker should receive 1099 vs payroll status.
You realize you need extra help at the store as the busy holiday season approaches. You would like to hire people to come in and work for the next few months.
You will hire a payrolled employee to help for the holiday season. Even though the work is temporary, you will dictate where, how, and when the employee completes the work.
Bookkeeping has become an overwhelming task. You want to bring someone onto the team that can take care of the company’s bookkeeping on a weekly basis.
You will hire a contractor as the company’s bookkeeper. Leave this task to the expert and let that expert complete it on their own schedule.
You are hiring someone for a new position. You have had difficulty with employees in the past, so you want to use a “trial period” to see if the new hire is a good fit.
You will hire a payrolled employee even when using a “trial period” to see how they fare. You will dictate where, how, and when the employee completes the work within that “trial period,” so they should be treated as a payrolled employee.
You are working on a project and need specialized, short-term help to finish it.
You will hire a contractor to assist you with the project. The independent contractor’s specialized knowledge and more flexible work parameters can expedite the project’s timeline.
AMS Tax Software Support
Both contractors and employees are essential to company success but filing for each position can become tedious and confusing. AMS has supportive tax software for all types of workers. The AMS 1099 filer can assist a wide range of company needs. The question of 1099 vs payroll workers will no longer be stressful, but another way that AMS can make tax season smoother.