There's a lot of confusion around W2 employees and 1099 contractors in businesses, but the penalties for misclassifying are quite clear. In 2022 alone, the DOL reported over $17 million in back wages paid to employees who were incorrectly classified. It's enough to make any business owner second guess their classifications!
So what distinguishes between the two?
First and foremost, the employment relationship helps determine whether your worker should be a 1099 or a W2. Employees are usually required to report to work according to a predetermined schedule, sign an Employee Handbook and follow all company policies (such as the dress code and PTO policy), and complete training. Independent contractors set their own hours and may work for multiple clients in the same day or week, follow a pre-determined contract (as opposed to a Handbook), and provide specialized skills and services that they already possess.
W2 Employees work for a specific salary or hourly rate, subject to applicable withholding, and are paid on a set schedule, according to the company's normal payroll practices. Specific paperwork including a W4 form and Direct Deposit form are required to pay the employee correctly. Independent contractors, on the other hand, submit invoices for their work. Pay and payment terms are usually discussed and finalized during contract negotiations. Taxes are not subtracted from their pay since true 1099 contractors are responsible for their own taxes.
W2 employees are eligible for company benefits such as holidays, vacation time, insurance, and 401K plans. There may be stipulations about being part time or completing probationary periods, but generally speaking, employees can take part in the various benefits their company offers. Independent contractors are not offered any of these company benefits. They do not get paid if they do not work, including holidays or vacations, and they are not on company insurance plans. Independent contractors should also hold their own insurance policies (such as worker's compensation and general liability).
Need additional explanation or help ensuring your workers are classified correctly? Elevated HR Consulting has extensive experience in helping organizations get and stay compliant with their workforce.
Contact us today to learn more!