W-2s and 1099s - Understanding the Difference

Let’s Start 2018 Off On The Right Foot!

Photo: Phillip Ingham/Flickr
Photo: Phillip Ingham/Flickr

January is almost here and, for businesses, that means it’s an opportunity to get a jump on preparing for the 2018 tax season. So as you think about keeping all those resolutions, let’s also start getting your W-2s and 1099s ready. While it might seem easy to understand the difference between a contractor who receives a 1099 and an employee who gets a W-2, business owners can and often do get easily confused.

There are many factors that can help determine whether someone who works for you is an employee or a contractor. For example, a contractor negotiates his or her rate of pay, typically either by the hour or by the job, and it can vary depending on the circumstances, such as the type of the work. An employee earns a salary or is paid an hourly wage that doesn’t vary.

Taxes and benefits are also a key differentiator between contractors and employees. Contractors for example, are responsible for paying their own taxes and FICA, while employees have that money withheld and forwarded to the IRS. Plus, contractors are responsible for their full FICA payment, while employees split that cost with their employers. Also, for employees, the company they work for often provides benefits like group health insurance and retirement benefits. Contractors are completely responsible for these costs on their own.

To be clear, knowing the difference between the two can be a complex issue, but it’s an important one. Because, if you don’t get it right and treat someone like a contractor who truly is an employee, they can come back later and take you to court for back wages and overtime. Plus, you would be responsible for any related payroll taxes, penalties, interests and FICA payments.

 

So make sure you consult with a professional as you head into the New Year. At One Stop Consulting Shop, we’re experts at working with businesses and providing all of their accounting needs, including taxes. For more information, please call us at 407-922-0918.