{"id":4507,"date":"2022-11-09T12:56:50","date_gmt":"2022-11-09T16:56:50","guid":{"rendered":"https:\/\/lgcassocprod.wpengine.com\/?p=4507"},"modified":"2024-03-01T14:23:46","modified_gmt":"2024-03-01T19:23:46","slug":"how-does-1099-work","status":"publish","type":"post","link":"https:\/\/lgcassociates.com\/es\/how-does-1099-work\/","title":{"rendered":"How Does 1099 Work (and Do Employees Really Save Money?)"},"content":{"rendered":"

How does 1099 work? And what the difference is between a W2 employee and a 1099 contractor? Whether you\u2019re an employee or an employer, it\u2019s crucial to know how they differ especially when it comes to finances and tax season.<\/span>\u00a0<\/span><\/p>\n

How Does 1099 Work?<\/h5>\n

It\u2019s the employer’s responsibility to make sure their workforce is correctly classified. If they don\u2019t, they could face a hefty fine \u2013 we\u2019re <\/span>talking<\/span><\/a> up to millions of dollars. If hiring is handled internally, usually human resources is responsible for worker classification. But if employers are utilizing a staffing partner, the staffing company oversees the classification process.<\/span>\u00a0<\/span><\/p>\n

Even though there are serious consequences for businesses who incorrectly classify workers, it can have an even bigger impact on the employee. If you don\u2019t pay the correct amount when filing, you may be subject to additional fines. <\/span>\u00a0<\/span><\/p>\n

But that\u2019s not the most challenging aspect of being a contractor \u2013 it’s being able to answer the question, how does 1099 work? Below we\u2019ll define the difference between W2 and 1099 employees and the risks associated with incorrect classification. <\/span>\u00a0<\/span><\/p>\n

The Difference Between 1099 and W2<\/span><\/b>\u00a0<\/span><\/h5>\n

The best way to understand the difference between 1099 and W2 employees is knowing who the employer is in either situation. If you\u2019re classified as W2, you\u2019re an employee of the company you work for; they\u2019re your employer. Under 1099 you\u2019re an independent contractor (IC) and are technically self-employed; you\u2019re your own employer.\u00a0<\/span>\u00a0<\/span><\/p>\n

Besides its definition, how to file taxes is the biggest difference between 1099 and W2 classifications. We\u2019ll go into what filing looks like for each type of employee below. <\/span>\u00a0<\/span><\/p>\n

Benefits + Risks Associated with 1099 Classification<\/span><\/b>\u00a0<\/span><\/h5>\n

Being self-employed is an attractive opportunity for some people. It affords the ability to be extremely flexible in both the work you\u2019re doing and how often you do it. You have more control over your taxes and may have a higher earning potential. If you\u2019re in a position where you work remotely or from home, being a 1099 employee might make more sense for you.\u00a0<\/span>\u00a0<\/span><\/p>\n

As a 1099 contractor, there\u2019s no employer for you to pay federal, state, or local taxes to \u2013 meaning you receive the entirety of your paycheck. Sometimes people confuse this with the notion that they don\u2019t have to pay taxes at all, which is incorrect. And can get you in big trouble with the IRS come tax time.\u00a0<\/span>\u00a0<\/span><\/p>\n

This means when filing your tax return, you need to account for the taxes that weren\u2019t removed from your paycheck. According to <\/span>ADP<\/span><\/a>, \u201cThe self-employment tax rate is 15.3%, of which 12.4% goes to Social Security and 2.9% goes to Medicare. Income tax obligations vary based on net business profits and losses, among other factors.\u201d <\/span>\u00a0<\/span><\/p>\n

If you haven\u2019t budgeted for taxes throughout the year, paying this sum at once can be challenging, which is why some prefer to have the taxes removed from each paycheck like when you\u2019re a W2 employee.<\/span>\u00a0<\/span><\/p>\n

There are additional (potential) risks associated with being an independent contractor that can come with serious consequences. These include:<\/span>\u00a0<\/span><\/p>\n