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Best Practices

W2 vs 1099

What is the difference, and why does it matter?

Misclassifying an independent contractor as an employee or vice versa can trigger financial penalties from the IRS. If you are hiring or contracting with other individuals to provide services, consider the following questions when classifying employees:

behavioral
  1. Who is telling who when and where to do the work?
  2. Who is providing equipment?
  3. Is there training by the employer?
  4. Did you give the individual a company email address?
Financial
  1. How are expenses being reimbursed?
  2. How is the employer paying the worker?
relationship to parties
  1. How does the contract or agreement describe the relationship?
  2. Is the work being performed by the worker a key aspect of the regular business of the company?
  3. Are any benefits being offered?
  4. What is the permanency of the relationship?

Employee (W-2)

  • Required paperwork: I-9, W-4, etc.
  • Workers Comp. Insurance
  • Pay Employer Taxes in addition to Gross Pay (approx. 11% of gross)
  • Strict filing requirements of payroll taxes (Federal, State & Local)
  • Subject to HR laws/issues – possible offering of employee benefits

Subcontractor (1099)

  • Required paperwork: W-9
  • Recommended: proposal for work to be done, submittal of invoices, contracts
  • Can’t file for unemployment

Additional Guidance

Resources to help determine the type of worker include IRS Form SS-8, IRS Publication 15, and IRS Publication 1779.

If you need help making the decision, check out this list of pros and cons of each type of hire. Also, you can reach out to your accountant or HR Specialist!

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