This article will help you answer the question, “1099 vs W2: which do your workers need?” We will explore considerations for employee classification and describe the necessary 1099 and W-2 forms. Employee classification requires a holistic analysis of the person’s role in the company. Ultimately, as an employer, you should assign the title of employee or independent contractor based on how involved you are in the work the employed person completes. You can determine differences between employees and independent contractors by looking at three lenses of the employment experience: financial, behavioral, and type of relationship.
1099 vs W2: Which Do Your Workers Need – Financial Considerations
An employer should consider the financial aspect of each employed relationship. For an employer-employee relationship, the employer often has control over the method of payment, which expenses are reimbursed, and what aspects of the work environment are covered by the company. Within an employer-independent contractor relationship, the employer often provides the independent contractor with a stipend, or per-service payment. They do not control much more within the financial realm.
1099 vs W2: Which Do Your Workers Need – Behavioral Considerations
Behavioral conditions of the employment are another consideration for employee classification. If the employer can exercise control over how, when, or where a worker does their job, then that worker is usually an employee. If an employer cannot exercise control over how, when, or where a worker does their job, then that worker is usually an independent contractor.
1099 vs W2: Which Do Your Workers Need – Considering Type of Relationship
Employers should also consider the nature of the working relationship. If the employer provides the employed person with paid time off, a pension plan, and insurance, then that person is usually an employee. The employer might also consider the longevity of the relationship, and what role the employed person’s services play within the company.
1099 vs W2: Which Do Your Workers Need – Forms and Filing Processes
After you have reasoned through each consideration and conclude whether someone is an employee or an independent contractor, you need to distribute the appropriate forms.
You will provide employees with a W-2 form, which reports the wages paid to that employee during the tax year with taxes withheld. A W-2 is necessary if the employee’s wages total at least $600 for the tax year. You must distribute W-2 forms by the end of January. The W-2 will report on the employee’s taxable income, Social Security and Medicare income, and state income.
You will provide independent contractors with a 1099 form. The most common 1099s are 1099-MISC and 1099-NEC, which report wages paid to independent contractors without taxes withheld. A 1099-NEC form is necessary if the independent contractor’s wages total $600 in payment, prizes or awards, rents, or services. A 1099-MISC form covers miscellaneous income that other 1099 forms do not cover. You must distribute 1099 forms by the end of January, however it would be prudent to begin collecting verifying information a few months prior in order to verify independent contractors’ names, addresses, and Social Security numbers.
The AMS 1099 filer can assist you in year-end payroll processing. Save time by filing W-2 and 1099 forms electronically with our easy-to-use e-filing system. Take the stress out of filing for employees and independent contractors and allow our user-friendly software to help.