Payroll for 1099 employees functions a bit differently than W2 employees for an employer. While you do hire 1099 employees for certain projects and other work, they are not the same as the W2 employees on your payroll. Because of their distinction, 1099 employees pay their own self-employment taxes, and employers simply pay the contractor the agreed amount. Since you will likely employ both W2 and 1099 workers, you should make sure your payroll software can support the necessary forms for both workers. AMS software can provide the services you need to process payments for any of your employees.
How Payroll for 1099 Employees Differs From W2 Employees
Even though 1099 workers may not be on your regular payroll like your other employees, you still need to follow steps to pay them. For a reminder of how the IRS distinguishes between W2 employees and 1099 contractors, you can reference this useful guide from the IRS. Here are the expectations for completing payroll for 1099 employees.
Typically, an employer and a contractor will agree on a contract for the work, which includes the payment amount. You might decide to do hourly pay, incremental payments over the course of the work, or an upfront payment for the whole job. If more compensation is needed after the work is done, a contractor may bill you for expenses or materials charges that fell outside the initial amount. Employers pay their W2 employees on a regular cycle whereas contractors usually receive one-time payments.
A key difference for payroll processing for 1099 contractors is the treatment of employment taxes. Employees on your payroll who complete a W-4 withholding certificate indicate how much of their payment you take out for taxes. They base this amount on their financial situation. As their employer, you are responsible for paying the appropriate employment taxes for each of their paychecks. However, employers do not pay employment taxes for contractors. Instead, the 1099 employee pays their own self-employment taxes to the IRS.
Employers must also consider the tax filing difference for employees and 1099 contractors. For employees, employers file a W2 to report income and tax withholding for the tax season. Employers file a 1099-NEC for their contracted workers for any payment that exceeds $600 in the year. Generating a 1099-NEC is simpler since you do not have to calculate any payroll taxes for a contractor.
AMS Software Makes Payroll for 1099 Employees Easier
The AMS Payroll and W2 and 1099 filer software modules have all the resources and functions employers need to accurately complete payroll for any employees they hire. You can create unique employee files that automatically save the information you enter so that you do not need to input their information multiple times. This feature is handy especially when you do hire a variety of employees for different work.
Payroll can be tricky to complete on your own, but AMS software ensures any user is supported with the necessary tools. Consider AMS software to help with a smooth payroll process.