As bookkeepers, we often have clients ask us about the difference between a 1099 contractor and a W-2 employee. It’s actually a pretty straightforward question to answer: Employees who you pay either hourly or by salary should receive a W-2, while an employee you pay based on a contract with a defined term should receive a 1099. The decision to make an employee a W-2 or 1099 contractor should be determined by the needs of the business and the future plans for the employee. An employee cannot be both a 1099 contractor and W-2 employee at the same time.
For employers, determining the classification status of employees and clearly communicating this status is important for taxation. For a W-2 employee, the employer withholds the taxes and sends those taxes to the IRS and state. For a 1099 contractor, it is the expectation that the employee will pay the appropriate taxes themselves (both employee and employer amounts) to the IRS and state. Employers will need to have a W-4 and state withholding tax form on file for W-2 employees. The W-9 is the form needed to hire a 1099 contractor.
Although the responsibility for withholding and paying taxes is different, the employee responsibility for under- or over-payment of taxes is the same. For example, if the employee with a W-2 has pre-determined percentages of each paycheck withheld by the employer and the IRS determines that the amount was too small at tax time, the W-2 employee will still have to pay the difference. For the 1099 contractor who was responsible for paying estimated taxes throughout the year, if the IRS determined the payments were too small, that employee will also have to pay the difference.
Remember, BKE can help you know what questions to ask, keep you informed of important updates and advise you on what’s right for your business.