W-2 vs. 1099 Classification
November 23, 2021

When determining whether someone should be considered an employee or an independent contractor (W-2 versus 1099), it is very important to make sure they are classified properly, which may require you to consult your CPA or tax consultant. There are fines and penalties associated with having a person mis-classified. The IRS can assess a fine up to $280.00 dollars per misclassification or $3.3 million dollars for an annual cap if there are several employees misclassified. That does not include any additional employment taxes the employer may owe for mis-classified wages, plus penalty and interest that is due on those taxes. Therefore, it is very important to have the employees classified correctly.


There are several sets of criteria used in general; and the criteria is somewhat vague in determining if someone should be considered a 1099 or a W-2 employee. Here’s some general criteria that can help in determining how a person is classified and how they are paid.


1099 Workers

A 1099 worker is one that is not considered an “employee.” Rather, this type of worker is usually referred to as a freelancer, independent contractor, or other self-employed worker that completes particular jobs or assignments. Since they're not deemed employees, you don't pay them wages or a salary. Employment taxes such as the employer portion of Social Security, Medicare, FUTA and SUI do not apply in these cases. These workers are responsible for their own taxes that they will reconcile on their personal or business income tax returns.


W-2 Employees

A W-2 employee is what we normally think of as a typical hourly or salaried employee. Unlike independent contractors, W-2 workers are not their own business owners. They work for your company, participate in employee benefit programs, and work according to your business's needs and schedule. This is where the above-mentioned employment taxes come in to play. 


The descriptions were intentionally left somewhat vague as it should be an employer working with their CPA or tax advisor to determine proper classifications. Neither ADP nor SimcoHR can make that determination for you.


As you can see, having someone classified as an independent contractor versus an employee would cost a company less money in employment taxes. This makes it more attractive of a classification, but if the classification is not correct, and the misclassification is discovered, it can be much more costly in the end. I have seen this happen in the newspaper industry. Traditionally, newspaper delivery people or carriers have long been considered independent contractors. In this specific scenario, the company was actually using a company van to drop the carriers off at a point of their route, and the carriers had to be at a specific location at a specific time to get that transportation. Because of that type of control by the company, it was deemed that these carriers were indeed employees, and not independent contractors, and the company had all sorts of back taxes and penalties to pay.


In conclusion, in order to avoid costly fines and make sure you have the proper employee classifications. Your tax advisor is your go-to contact for counsel.  

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