1099 vs W2: What is the Difference?

1099 vs W2
1099 vs W2: What is the Difference?

The difference between a W2 employee and 1099 contractor can be confusing. With the different changes in laws (Federal and States) it can be overwhelming. Having a knowledgeable human resources department will be important for items such as these. Knowing the difference and how to classify them probably with the IRS is vital. Otherwise, your company can face a lot of costly penalties or even a lawsuit if it is not done correctly.

Let’s break down some of the key differences between a 1099 and W2 employee. Although both provide businesses with key services, understanding the difference and classifying the employee correctly will be vital as if the employee is misclassified, it can lead to costly fines and legal fees as mentioned above.

What are Independent Contractors/1099 employees?

An independent contractor also referred as a 1099 employee or freelancer is self-employed. They perform work or services to another entity, but they are not the entity’s employee. Meaning the entity does not pay for employment benefits such as healthcare, retirement accounts, employment taxes, etc.

What are W2 employees?

A W2 employee is what we typical think employees working for companies are. However, W2 employees are not their own owners they work for a company and the company provides employee benefits such as healthcare benefits, retirement accounts and employer payroll taxes, etc.

1099 vs W2: But what exactly is the key differences?

From the beginning of the job, a 1099 employee receives job duties and payment based off the terms in the contract that was agreed upon prior to starting. Whereas for a W2 employee, a company is entitled to let them go due to any valid, non-discriminatory reason such as performance.

Employers are also provide all the tools and supplies for their W2 employee that are needed for their job such as computers and where 1099 contractors provide their own supplies. Unless the 1099 and the company agreed upon reimbursement in their contract.

Where most companies get confused about classifying correctly is that there are different tests on a federal and state level, and they are changing quite a bit. If you are not knowledge about this, it would be smart to use a professional employment agency or staffing firm that can help with classifying. As they are well versed in the tests and are able to help you avoid any penalties and can ensure your workforce is classified correctly.

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