Employee vs Independent Contractor

If you own a small business or are thinking about starting one, you will need to have a good understanding of the difference between a regular W-2 employee and a 1099 independent contract. It is usually more beneficial for an employer to have a contractor rather than an employee because the employer does not have to spend the time and effort to do payroll for that worker. Unfortunately, you don't get to just choose which status you put a worker into. The IRS forces you to choose one status or the other based on your relationship with a worker. The more supervision you have over a worker, the more likely it is that the worker should be a W-2 employee. The more independence they have, the more likely it is that they should be a 1099 contractor.

A W-2 employee is somebody who gets taxes taken out of their pay and after the end of the year they receive a W-2 form. Then, they report their wages on their tax return and, at that point, they can take the appropriate deductions.

An independent contractor, on the other hand, is a self-employed, independent person who doesn't have any taxes taken out. After the end of the year, they receive a 1099 Misc form which states their income. Usually, the income they earn is listed in box 7, which is non-employee compensation. They'll file a schedule C on their tax return and take all the appropriate deductions and expenses.

The status a worker is given should be determined by how they work. A W-2 employee has set working hours, is supervised as they work, and is told how to do their work. The employer provides all the equipment to do the work. If there is a problem, the employer has to take care of it.

In contrast, a 1099 independent contractor is hired to do a certain job, isn't told how to do it, and isn't supervised as they are doing it. They might be given a deadline for a project, but they aren't given certain hours that they have to work on it. They provide their own equipment or computer to do the work. Basically, they're own their own and may have other clients that they are working for.

Many workers won't fall completely into once category or the other. For example, a worker might use the employer's computer, but may set their own hours and work mostly unsupervised. You have to consider all the criteria and make a decision as to which category they are closer to. It is easier as an employer to hire a worker as an independent contractor, but remember to always be honest with your assessment so you don't get in trouble with the IRS.