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When correct classification matters.

As a business owner, you may hire both W-2 employees and 1099 independent contractors. If you are like many owners, you don’t always know how to classify workers- and this can lead to compliance issues. Classifying workers appropriately is critical because employees and contractors differ greatly in terms of taxes paid, withholding requirements, workers compensation, benefits, payroll tax filings, and more. The top two questions business owners need to ask themselves when it comes to staff:

  • Do I have W-2 employees or 1099 contractors working for me?
  • Have I classified my workers properly?

Below is a quick Q&A list of the most common W-2 versus 1099 classification situations that will help you answer the above questions. If you’re still unsure, contact a human resource or payroll company like Payroll Vault to get the answers and advice you need to make the right decision. Expensive fines and penalties can be avoided with a simple phone call.

I have an employee if he/she…

  • Works exclusively for my business.
  • Is paid a salary or an hourly rate.
  • Requires more than minimal or basic training or direction.
  • Works a set amount of hours as defined by my business. For example: 8 am – 5 pm (employee) versus completion of work by an agreed upon date (contractor).

I have an independent contractor if he/she…

  • Does not work exclusively for my business and serves multiple clients.
  • Is not paid a set salary or by an hourly rate, but rather charges a fee per project or based on a defined contract.
  • Is free from business control and direction of how the service is performed and is engaged in an independent business related to the service being performed.

There are pluses and minuses for having people work with you or for you, and knowing how to properly classify them when it comes to paying for work performed is critical in today’s business world. Knowing the clear definition of an employee and contractor will save you from fines and penalties.
Payroll Vault doesn’t provide HR advice. We recommend contacting a certified Human Resources Consultant regarding specific classification between employees and independent contractors.

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