Properly classifying employees is important for payroll tax filing, so knowing the steps for switching employees from W2 to 1099 will help ensure you complete the transfer correctly. W2 and 1099 employees are different, but not everyone knows that distinction. Employers are responsible for filing 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 guidance on switching between the two.
Employers commonly hire both kinds of employees, so your tax software should meet your personnel needs. AMS software — from our W2/1099 Forms Filer to AMS Payroll — can help you manage your 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 the behavioral and financial relationship between the worker and the employer. Employers use a W2 to report the income for their employees. Employers withhold a set amount of income from their employees’ pay to cover employment taxes. A W2 reports both the employee’s income and the withheld income. For independent contractors, employers file a 1099 form. Independent contractors pay their own self-employment taxes, so employers only report the amount they pay to the contractor on a 1099.
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 they need for the business. Other times, the employer may need some type of work with less frequency, making it more reasonable for them to hire a contractor on the occasions they need a particular job done.
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.
AMS Software Can Help Process W2 and 1099 Employees
Switching employees from W2 to 1099 can be complicated, but AMS Payroll Software and W2/1099 Forms Filer Software simplify the steps. With AMS software tools, employers can easily navigate any changes to their payroll and year-end tax filing. The software has an easy-to-use, menu-driven format and automatically populates the forms with information you save.
Small businesses experience several adjustments to their workforce, so you 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 you may have.