If you’re the owner of a new or small business, you might be weighing the costs and benefits of hiring a contractor 1099 vs W2 employees. Knowing the difference between the two workers is important in deciding which type of employee best suits your business. We have put together this guide to distinguish between a 1099 and a W2 and run through scenarios in which one might be better than another. Regardless of the types of employees you hire, you will need a reliable tax software to help file year-end taxes.
Differences of Contractor 1099 vs W2
The IRS provides useful criteria to help you understand if a worker is a contractor or a payroll employee. In basic terms, 1099 contractors are self-employed, and you as the employer have no say over how the contractor works and are not responsible for withholding taxes. W2 employees are on your payroll, and you withhold FICA taxes from their pay. As their employer, you have a say over how W2 employees do their work and can have an agreed-upon work schedule.
During tax season, employers must file a W2 form for employees on their payroll, which reports the employee’s total income and tax withholdings. For a contractor, an employer files a 1099, which reports how much you paid the contractor for the work.
Hiring a Contractor 1099 vs W2
As an employer, there are pros and cons to both contractors and W2 employees. The best way to decide what you need is to understand your relationship to each kind and choose which relationship suits your current business needs.
Employer to W2 Employees:
- Employer supervises the work process of the employee
- Employer trains employee to ensure work is done a certain way
- Employer and employee agree on a set schedule and wage
- Employer must guarantee legal workplace protections for employees
- Employer must process new employees with a W-4 to verify the person’s eligibility and establish the correct tax withholdings
- Employer is responsible for paying FICA taxes and filing a W2 for year-end tax reporting for employees
Payer to 1099 Contractors:
- Payer can assign projects and a deadline to contractors but cannot control how the contractor works
- Payer is not able to determine a schedule of working hours for a contractor
- Payer does not provide training to the contractor for the project
- Payer does not withhold taxes from the payment to the contractor; the contractor pays their own self-employment taxes
How AMS Can Help You File for Contractor 1099 vs W2
As your business grows and your payroll and tax needs become more complicated, AMS software can grow with you and provide the services you need. Our Payroll Solutions and W-2 and 1099 forms filer are two assets for any new business. Our modular approach allows you to build your own software so that you only pay for what you need. You can establish individual employee files to make sure you properly categorize each employee and file the correct forms. Payroll and tax filing can be overwhelming for those new to the steps, but AMS software breaks down the process and makes filing easier.