Should Your Employees be 1099 or W2?

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As a business owner, you are responsible for many things and one of them is properly categorizing the people you hire. For some businesses, the definition is quite simple but for others it can be confusing. In this blog, we will look at how you determine whether the people you hire are contractors or employees and what implications it will have on your business.


Employee or Independent Contractor?

When deciding whether your worker is an employee or a contractor, the IRS will consider 3 factors. These factors are behavioral control, financial control, and the nature of the relationship. Let’s take a closer look at each of these.

Behavioral Control

Behavioral control looks at how much say you have in how work is performed. For example, if you supply training, then this would typically imply that the worker is an employee. If you have a direct impact and influence over the way work is conducted and the final results achieved, then this would also imply that the worker is an employee. A contractor, on the other hand, retains a lot of autonomy and control over their workflow and methods of delivery.

Financial Control

There are a number of financial issues that can determine whether a worker is an independent contractor or employee. For example, if the worker has unreimbursed business expenses, they’re more likely to be considered a contractor. Fixed ongoing costs that are charged regardless of whether work is currently being undertaken can be an important factor as employees are more likely to have these kinds of costs. Then there is the issue of incurring a loss. If a worker incurs a loss as a result of their workload, they’re more likely to be considered a contractor.

Type of Relationship

Lastly, the nature of the relationship between you and the worker will be looked at. If you provide the worker with benefits such as an office, insurance, sick pay, or benefits, that points to that worker being an employee.

In summary, if a position requires the employee to follow directions on how, when, where, and with what to perform the work, they are a W2 employee. If you provide any benefits outside of the payment for the work, they are also likely to be an employee. If, however, you are hiring someone for a final product but leaving the means up to them, they are a contractor.

Implications of a W2 Employee

Upon hiring a W2 employee, you’ll need to set up payroll to withhold taxes. There are a number of steps you’ll need to take:

  • Federal Income Tax

You need to withhold taxes for each your employees. This is done by collecting a signed withholding exemption certificate (Form W-4) from each employee and submitting it to IRS.

  • State Tax

Depending on the state your employees live in, you might be required to withhold state income taxes.

  • Federal Wage and Tax Statement

The federal government requires you report the amount of wages paid and the amount of taxes withheld for each employee each year.

Required Insurance

You will also be required to purchase workers compensation through a commercial carrier, the state program, or on a self-insured basis. This is required by law to cover compensation in result of bodily injury by accident and/or by disease. This way you are not legally liable for any injuries or accidents as a result of the employment of an individual.

Other Benefits

To keep your employees happy and stay competitive, you may want to offer any or all of the following in addition.

  • Health insurance

Health insurance can help workers to remain fit and healthy for work. It could include paid time off, check ups and the coverage of any other medical necessities.

  • Paid vacations

Having a paid vacation can boost morale, keep workers relaxed and happy and make them feel valued. After a few days off, an employee can come back refreshed and working harder than ever.

  • Dental or vision plans

We all need a dentist, so offering dental coverage can really help give you the edge over other employers. Similarly, offering a vision plan can help those with poorer eyesight to see clearly, which again boosts morale and performance.

  • Life insurance

Life insurance gives employees peace of mind, especially those with families.

  • Retirement plans

Knowing what the future holds can be reassuring for employees and is not something that independent contractors necessarily experience. Retirement plans are a great way of retaining employees for the long haul.

There you have the basics of properly categorizing a worker as a contractor or a W2 employee. While employees do require more investment from the employer, you can rely on them on an ongoing basis and can outline exactly how work is done. On the other hand, contractors are less responsibility for employers but also limit the control you have over the work.

Be sure to know the difference, file properly, and take the proper steps towards managing your workers to avoid problems down the road. If there is any question in your mind, it’s best to consult with a professional. Contact us today!