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What’s the difference between an employee and a 1099 contractor?

If you are at the stage when you are hiring, deciding between an employee and a 1099 contractor can be tricky and overwhelming at times. I hear this question quite often and I want to ease the pain of confusion when deciding whether to hire an employee or a 1099 contractor.

Think about your responsibilities between the two:

Employee:

  • You withhold taxes
  • You typically train them
  • You may provide benefits
  • You have “control”
  • Issued a w-2

1099 Contractor:

  • They have a specific role/task to perform
  • Set own hours
  • Typically use own tools/resources
  • Taxes are not withheld
  • May work as a freelancer or have business
  • Issue 1099

With that in mind, there’s no magic formula to determine if you should hire them as an employee or contractor. However, the IRS says you should review the behavioral, financial and relationship.

Questions to ask yourself:

  • Do you have control as to “how” the work is performed?
  • Are you setting their time? Vacation?
  • Do you have performance reviews?
  • Are you providing training?
  • How is the worker paid? Employer pays taxes or that falls on the worker?
  • Do you provide benefits such as (healthcare, vacation, 401K, bonuses, etc)?
  • Is the relationship permanent?
  • Do you have a contract?

Answering these questions will guide you on making the right decision for your business, after you determined person is an employee or a contractor, make sure you document the factors that led you to that determination.

Misclassification:

Often times, the person can be misclassified into the wrong category. It means you labeled the person as an independent contractor rather than an employee and it could have harsh penalties. Here are some common penalties:

  • Reimbursement for wages you should have paid an employee, like overtime and minimum wage
  • Back taxes and penalties for federal and state income taxes,
  • Social Security, Medicare, and unemployment Payment for misclassified employees’ workers’ compensation benefits
  • Providing employee benefits, including health insurance, retirement plans, etc.

With this in mind, think about the points stated in the blog when hiring an employee or a contractor.

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Small Business

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