What You Need To Know About 1099 vs W2 Classifications

Posted on February 6, 2020 by BWBacon. Tagged: Resources for Candidates, For Candidates, Resources for Entrepreneurs

Our team recently participated in a seminar about employment law and the latest changes made for the state of Colorado. Understanding a 1099 vs W2 was an essential part of identifying how contract work operates legally within the state. We want to help you understand how to determine whether your team functions best as permanent employees, independent contractors, or a mix of both, along with what each truly means.

Please note: This post is purely informational. If you have more in-depth questions regarding this topic, please contact your legal team.

Understanding The Difference Between 1099 vs W2 Workers

What Is A 1099?

Form 1099-MISC (Miscellaneous Income) is a document required by the Internal Revenue Service (IRS) for taxpayers to report non-employee compensation. Businesses make this payment — not a person. For example, if you work with independent contractors, they receive a 1099. 

Independent contractors, freelancers, sole-proprietors, and self-employed individuals receive one from each client who paid them $600 or more in a calendar year. The form is also used to report miscellaneous compensation such as rents, prizes, awards, and healthcare payments. 

What Is A W2?

A W2 form, also known as the Wage and Tax Statement, is the document an employer is required to send to each employee and to the IRS at the end of the year. This form reports the employee's annual wages and the amount of taxes withheld from their paychecks. As an employer, you're legally required to send out a W2 form to every employee who received a salary, wage, or another form of compensation (excluding contractor work). 

Employers also use W2 forms to report the Federal Insurance Contributions Act (FICA) taxes for their employees throughout the year. Typically, complete W2 forms must be filed with the IRS and Social Security Administration on or before January 31 for the previous year. 

Why Are These Forms Important?

These forms must be filed to remain compliant with the IRS and other government organizations. Properly filing these forms helps your organization avoid legal penalties, allows you to file taxes accurately, and helps keep you in financially good standing. 

Your employees and team members also rely on receiving these documents to complete their taxes each year. 

Differences Between Contractors and Employees

It may sound simple, but there are some specific requirements that help identify if your team members are independent or permanent. 

You can determine if a particular worker is an independent contractor or an employee by the degree of control the employer has over the worker and their work. The IRS looks at three particular areas in making this determination

  1. Behavioral Control, which includes factors that show whether the employer has a right to direct or control how the work is done through instructions, training or other means
  2. Financial Control, which includes factors that show whether the employer has a right to direct or control the financial and business aspects of the worker's job
  3. Type of Relationship, which includes factors that show how the workers and the business owner perceive their relationship

Defining An Independent Contractor

We know already that an independent contractor receives a 1099. Ultimately, a worker is identified as a contractor if they have autonomy. That means they can work freely with guidance from your team, but are not required to follow specifics laid out in company handbooks. Typically, they sign nondisclosure agreements to keep your private information safe, but they operate as their own entity. 

According to Colorado Law, "an individual is presumed to be in covered employment unless and until it is shown that the individual is free from control and direction in the performance of services, both under contract and in fact, and that the individual is customarily engaged in an independent trade, occupation, profession or business related to the work performed. This means that the worker will be presumed to be in covered employment until the putative employer meets its burden to establish otherwise. This burden may be shifted to the Division, however, through the use of a written document or contract. If the contract meets all of the requirements of the law, the worker would be presumed to be an independent contractor and it would be the worker's burden to establish otherwise. Please keep in mind this does not mean the worker would ultimately be determined to be an independent contractor, only that the burden of proof would be shifted."

Defining A W2 Employee

A W2 employee is someone whose employer deducts taxes from their paychecks and submits this information to the government.

According to the IRS, "under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed."

Your W2 employees are typically paid a salary or part-time wage and work on your determined schedule, receive benefits, and are a permanent member of the team. Proper classification is important because for one, employees are protected, and as an employer, you pay several taxes, on their behalf, including: 

  • Medicare
  • Social Security
  • Unemployment
  • Income

In addition to paying Medicare and Social Security taxes, you must also withhold these taxes from the paychecks of W2 employees. Avoiding this can be beneficial to your company, but incorrectly designating someone as a 1099 employee can land you a fine from the state.

We hope to have enhanced your comprehension of 1099 vs W2 classifications in the state of Colorado. Please utilize these resources to help answer additional questions or reach out to your recruitment partner for details.

Here at BWBacon Group, we know and live what you are experiencing as an employer or job seeker in Denver, Boulder, Dallas, San Francisco, New York City or any of the other cities we work in. We believe great recruiting starts and ends with understanding people.

If you have any questions about living, working or playing any of the areas we serve, please contact us. We are happy to help. Seize the day, every day, that’s what we say!