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Employee vs Independent Contractor
| Guest post by: Will Bolton |
Article Overview: 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.
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Free Download - What Business Type Do I Need For My Small Business? By Will Bolton |
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.
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Article Tags: 1099, 1099 contractor, employee, employee vs 1099 contractor, employee vs contractor, employee vs independent contractor, independent contractor
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About the Author: Will Bolton RSS for Will's articles - Visit Will's website This article is brought to you by John Michael Miller CPA Inc, one of Atlanta's most reputable accounting firms. We also work with clients from all over the United States. We specialize in tax preparation, accounting services, financial planning, payroll, and new business setup. Contact us today at www.SolvingTaxes.com Click here to visit Will's website   Employee vs Independent Contractor What Business Type Do I Need For My Small Business Audits Always Be Prepared |
Related Forum Posts
Post subject: It's Not Personal, just business
- I so agree! Actually, the business world as we know it IS in trouble. I heard some stats last week that they expect by the time 2050 that 70% of workers will be freelancers. Employee/Executive Bullying won't be able to stand it when it could be easier for someone to simply contract with the nicer guy (or gal). I, for one, will be choosing the nicer ones!
2 Forums Updates
- Many of you have been writing in suggesting that on my website and in my newsletter we include the link to the actual forum post and not just the name of the post and a link to the Forums home page. Well, after looking into it I'm pleased to announce that this feature is now available. Thank you everyone for the suggestions!
We've also added names for members based on how much they post. Level one is Newbie, Level 2 is Intern, Level 3 is Employee and so on... There are 10 levels in total. I'm looking forward to seeing how everyone does!
Keep the suggestions coming - they are great!
Re: Finding AND Keeping Good People
- Employee retention or as you mention “Keeping the Good People” is one of the biggest challenges for any growing business. It takes a huge effort from the entrepreneur’s end.
I can come up with the following when it comes to KEEPing the good people-
1. Motivation of the employees
2. Recognition of the needs of the employees
3. Activities to make the employees feel valuable towards the organization
4. Make benefits more accessible
5. Offer profit sharing incentives
6. Create clear career paths at the company
7. Consider telecommuting, job sharing and other flexible working arrangements
8. Incentives are essential and they don't have to be huge
9. Have other managers praise an employee's work
10. Be sensitive to the balance between work and private life
Re: Are you Self Employed or a Business Woman?
- I had a chuckle over that comment. My husband and I built a house together a few years ago and I think it's a huge testament that we are still married! I was the official General Contractor. We're both leaders so it was QUITE interesting at times.
We had to REALLY consider whether we'd do this project, but we've both grown a lot and we are very excited about our prospects. Stacey is a teacher so he won't be around during much during the week and we plan on hiring staff to do most of the work once we are set up.
The idea is working smarter instead of harder. :0) We plan on this being a true business that can eventually run itself when we are out of town. I don't need another job!
We are in a smaller tourist town that is very big on sports. My husband is an active sports fanatic and since I really enjoy being creative around business, we decided to pursue opening a sports store together. We actually decided on a sports consignment store so that we could fill in a gap and give back to the community.
It's not a huge money maker in itself, but has a lot of potential for revenue related to it. It's in a high traffic location and we want to make it like a community information center for the adventurous residents and visitors. We're even looking at including a takeout cappuccino bar to really draw people in.
It's in a new corner building and the space is at the drywall stage. Right now is the huge task of setting it all up, but I'm really enjoying it. It's actually like a game for me!
Thanks for asking,
Tami
Chain store hurdles
- [quote:3v8nzz4s]Everyone I'm targeting are independent stores which helps me overcome one hurdle. [/quote:3v8nzz4s]
What hurdle is that?
I know the major stores like B&N, etc. like to deal with buyers and distributors, but I think they all cut some slack to "Local" authors, don't they? Every store I go into has its "Local Section," featuring local authors, as well as books about the locality.
I wouldn't bypass them altogether. If you drive past one, why not go in and visit, talk to the manager, see what they say?
[quote:3v8nzz4s]Bookstores want to order through Bowkers and I have their info and the ISBN (identification) numbers for my books. [/quote:3v8nzz4s]
You mean the major chain ones do, right? Independent stores I think have no problem dealing directly with the publisher/author. But you want to get your money up front if possible in case they go out of business....as too many independents do these days.
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