What Employees Should know about W-2s and 1099s

w-2-picture-300x225Employment arrangements have changed over the years, and it is important for workers to understand the benefits and setbacks of being an employee or an independent contractor. Full-time employment, often with the same company, used to define the career arc of workers. This is no longer the case. Employees are less likely to stay at one job or expect permanent tenure. In some cases, employees may be doing the same jobs as independent contractors with only the paperwork prepared by payroll services to distinguish between the two groups.

Defining the Employee-Employer Relationship

Working hours are usually set by the employer for employees. You will most likely report to and be under the supervision of the business. Typically, the company will provide equipment and supplies but will also insist on full compliance with specific standards and business processes.

Independent contractors determine their own work hours and work strategies. The business is referred to as a client rather than employer. Contractors are responsible for their own expenses and for providing supplies and equipment needed to perform their jobs.

Wages and salaries are reported on a W-2 for employees while independent contractors will receive a 1099-MISC at the end of the tax year. For employees, there is a world of difference between these two tax forms.

W-2 versus 1099

Being a W-2 employee means that taxes are withheld from your earnings at the time that wages are earned. However, employers contribute 6.2 percent of the Social Security tax and 1.45 percent on the regular Medicare tax under the Federal Insurance Contributions Act or FICA. In essence, a W-2 worker will receive a salary net of deductions while a 1099 worker receives gross pay but will be responsible for all taxes. For an independent contractor, payroll taxes will amount to 15.3 percent on the first $118,500 of earned income.

Since the client-employer does not withhold taxes on the income of 1099 workers, the Internal Revenue Service requires quarterly payments to cover the estimated payroll taxes for the year. Contractors are responsible for making these payments.

Employees receiving a W-2 at the end of the year may also have other benefits, including health and disability insurance, worker’s compensation benefits for workplace injuries and unemployment compensation after a job loss that conforms to certain guidelines.

The wages of W-2 employees are subject to federal and state labor laws, particularly those related to minimum wage and overtime rules. On the other hand, independent contractors are paid according to the terms of their contract regardless and may not be entitled to overtime or any other extra compensation, including unemployment and disability benefits.

Independent Contractor or Employee: Which is the Better Choice? Ask A Payroll Services Provider

Studies show that there has been a steady rise in the number of independent contractors in the workplace. Employers are finding that using independent contractors for non-permanent positions is an efficient way to manage the payroll, but maintaining a pool of full-time employees is needed as well. Supervising a mixed workforce can be an administrative nightmare but not if payroll services are outsourced. Using a professional outfit, such as Wisconsin-based Integrated Payroll Services, Inc., will give you the flexibility to manage payroll changes as needed. As labor and tax laws become more complicated, the expertise of these specialized providers will help you manage your business more efficiently.