If you are a business owner looking to hire an employee and/or someone to work with or for you, you will need to determine the status of the individual. Meaning, you need to understand if the individual will qualify as a W2 employee or a 1099 independent contractor.
This is important for a few reasons and it all comes down to the forms they file and the taxes that are paid.
First of all, you want to ensure you are IRS compliant and filing properly. There are requirements that individuals must meet if they are considered an employee or an independent contractor – and some of the questions below will point toward those requirements.
Second, you want to ensure you are paying taxes as you should. If the individual does meet the requirements for being an employee and must be considered as such, there are tax implications such as unemployment and worker’s compensation, which must be paid and added into the cost of keeping that person employed. If you file a person as a 1099 independent contractor and it is later determined that he/she was actually an employee, you may be required to pay the required back taxes.
Here are a few guiding questions to consider when determining if the individual working with or for you should be considered an employee or a 1099 independent contractor.
Note: While the answers to these questions will not be the only factor determining the status, these questions will help you understand what you must consider. Please be sure to discuss with your accountant before making your final decision.
1. Where and when does this person work? Do you determine his/her schedule and responsibilities? Who is in control?
If the worker can work whenever and from wherever, and isn’t required to be present at an office or physical space or be “on” at specific times, then there is a good chance he/she can be considered a contractor. A component of the defining line between employee and contractor is dictating the schedule and location of where one must work. So even if the worker can be remote, are there specific hours he/she should be working? If not, a 1099 contractor is probably the way to go.
2. How are you paying this person and how much? Are you paying the worker in cash or check? And will the total be over $600 for the calendar year?
If his/her income will total less than $600 and you are paying in cash, then the individual will likely be a contractor and he/she will not be required to report the income. If you are planning to add the individual to a recurring payroll and do want to pay taxes up front, then the individual will be an employee. Factor in the above with this question and that will give you a good idea of where you are headed.
3. What are you offering the individual?
Are you planning to provide benefits, training, or other perks? Will you be reimbursing for expenses? If so, it can be beneficial for you to add the worker as an employee and streamline how you distribute and administer the benefits and perks.
While this decision can be a bit challenging to make, making the correct decision and ensuring compliance will lessen the chance of negative tax implications and the headache of juggling finances and/or losing money. Educare yourself and choose wisely! Happy hiring.