1099 or W-2? Getting It Wrong Could Cost You
Hiring an independent contractor can provide businesses with flexibility, but simply calling someone a “contractor” or paying them on a 1099 does not automatically make them one. Worker classification is based on the actual relationship between the business and the worker. Getting that classification wrong can expose an employer to back taxes, wage and overtime claims, penalties, and other compliance issues.
W-2 Employee vs. Independent Contractor
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W-2 Employee
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Independent Contractor
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Business generally controls how, when, and where work is performed
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Generally controls how the contracted work is completed
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Paid through payroll with applicable taxes withheld
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Responsible for their own taxes
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Often uses company-provided tools, systems, or equipment
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Provides their own tools or resources
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Typically performs ongoing work as part of the business
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Provides services on a project or contractual basis
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May be eligible for employee benefits and employment protections
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Generally operates independently and is not eligible for employee benefits
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A 1099 Doesn’t Automatically Mean Contractor
One of the biggest misconceptions is that a business and worker can simply agree that the worker will be an independent contractor.
A contract can help document the relationship, but the label does not override how the relationship actually operates.
If your “contractor” works a company-set schedule, receives significant direction from management, performs an ongoing function within your business, and otherwise operates similarly to your employees, it may be time to review the classification.
Why It Matters
Misclassifying an employee as an independent contractor can create exposure involving payroll and employment taxes, minimum wage and overtime requirements, unemployment, workers’ compensation, benefits, and state-specific employment requirements.
Not sure whether a worker should be classified as an employee or independent contractor?
Before making the decision, reach out to your Simploy team. We can help you review the working relationship and identify potential classification concerns before they become a larger compliance issue.
