By now, you’re already aware that running a company isn’t easy. One of the most important ─ yet challenging ─ aspects is keeping the IRS happy. It’s important to determine whether your team members should be classified as W2 or 1099 employees, to ensure you’re paying and withholding the proper taxes.
Normally, you’re responsible for withholding income taxes, withholding and paying Social Security and Medicare taxes, and paying unemployment taxes on earnings paid to employees. However, you typically do not have these responsibilities for a 1099 independent contractor.
Four Different Types of Workers
The IRS classifies four different types of workers, including:
- Employee: When you have the right to control what work is done and how it is completed, the person should likely be categorized as an employee.
- 1099 Independent Contractor: If you only have the right to control the end product produced by the worker, not the how the work will be completed and what will be done, the person is likely an independent contractor.
- Statutory Employee: Even if workers meet the general standards of independent contractors, you may still be required to treat them as employees by statute if they fall into certain categories or meet specific Social Security and Medicare tax guidelines. This may include situations such as delivery drivers, life insurance sales agents, certain employees who work from home, and full-time traveling sales professionals working on your behalf.
- Statutory Non-employee: This category of workers includes direct sellers, licensed real estate agents and some companion sitters.
How to Determine Classification
It’s not always easy to determine which of the above categories a worker fits into. According to the IRS, the evidence falls into the three categories below:
- Behavioral: Do you have the right to control what the person does and how they complete their work?
- Financial: Do you control financial issues like how the person is paid, whether expenses are reimbursed, and provide necessary supplies needed to complete their work?
- Type of Relationship: Do you have a written contract with the worker? Do you provide them with benefits? How long do you plan to continue the relationship? Is their work integral to your business?
If you still aren’t sure, you can file a Form SS-8 and the IRS will review the information and determine the person’s employment status for you.
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