As the end of the year approaches, it’s time for employers to distribute W-2 and 1099 forms, marking an important reminder to review worker classification. Properly categorizing workers is crucial to compliance, yet misclassification is a mistake employers often make. It is estimated that 10-30% of U.S. employers incorrectly categorize their workers as independent contractors. Misclassification, whether accidental or intentional, can lead to significant penalties, fines, and legal issues.
What are the differences?
A business can hire both employees and independent contractors, but it’s important to understand the significant legal differences between the two, including tax implications, benefits eligibility, and workplace rights.
Employees have income tax, Social Security, and Medicare withheld from their paychecks and may be eligible for protections under employment and labor laws. They receive a W-2 form that serves as a record of compensation, certain benefits, and taxes withheld.
Independent contractors, on the other hand, have no taxes withheld and are not entitled to the rights and standards provided by employment and labor laws. They receive a 1099 form that shows how much an organization has paid them. It is provided when a business has paid a minimum of $600 for a service and taxes were not withheld.
What should I look for?
Determining the correct classification can be challenging. There are several factors to consider. Here is a breakdown of what they are:
Employees (whether full-time, part-time, temporary, or seasonal)
- Commit to specific hours, a designated place of work, and how the work is done
- Are hired for an indefinite period of time
- Typically work for one employer
- Get paid on an hourly or salaried basis
- Receive company benefits, such as health insurance and paid time off
- Are protected by the Fair Labor Standards Act (FLSA) for overtime, wages, and other employment protections
- Use company-provided tools and resources
- May be trained
Independent contractors (often referred to as consultants, gig workers, or freelancers)
- Perform a specific job within a certain amount of time
- Perform work for multiple companies
- Provide their own tools and resources
- Hired for their expertise
- Control their own method of work
- Do not receive employment benefits or overtime
- Pay their own taxes
- Receive payment per project or a flat fee
Are you confident in the classification of your employees? If not, Counter Point can help. Making the determination can be tricky and non-compliance can be costly. We can help your organization navigate compliance so you can focus on more strategic tasks.
