{"id":4539,"date":"2023-01-18T15:30:44","date_gmt":"2023-01-18T19:30:44","guid":{"rendered":"https:\/\/lgcassocprod.wpengine.com\/?p=4539"},"modified":"2024-03-01T08:03:35","modified_gmt":"2024-03-01T13:03:35","slug":"how-1099-works-and-what-risks","status":"publish","type":"post","link":"https:\/\/lgcassociates.com\/es\/how-1099-works-and-what-risks\/","title":{"rendered":"How 1099 Works and What Potential Risks Businesses Face"},"content":{"rendered":"

Do you know how 1099 works? Do you know the difference between a W2 employee and a 1099 contractor? As employers, it\u2019s crucial to understand how to classify workers \u2013 otherwise you can face hefty fines and other risks that have a huge impact on your bottom line. <\/span>\u00a0<\/span><\/p>\n

It\u2019s not only the employer of record that\u2019s affected by misclassification. If <\/span>employees are misclassified<\/span><\/a>, they face several challenges including paying out of pocket during tax season. Though the responsibility falls on the employer, both parties must be knowledgeable about W2 vs 1099 and which classification is appropriate for the individual employee.\u00a0<\/span>\u00a0<\/span><\/p>\n

Below, we\u2019ll define the differences between W2 and 1099 workers and the possible risks businesses may face with incorrect classification.\u00a0<\/span>\u00a0<\/span><\/p>\n

The Difference Between Them<\/span><\/b> and How 1099 Works<\/strong><\/h5>\n

The best way to understand the difference between 1099 and W2 employees is knowing who the employer is in either situation. If an employee is classified as W2, you\u2019re the employer. Under 1099 they\u2019re an independent contractor (IC) and are technically self-employed; the worker is their own employer. In more layman\u2019s terms, employers have more control over various employment-related factors under the W2 umbrella.\u00a0<\/span>\u00a0<\/span><\/p>\n

Besides its definition, the biggest difference between 1099 and W2 classifications is filing taxes and workers compensation insurance. We\u2019ll go into more detail below, but first it\u2019s important to understand that there are some situations that call for an independent contractor vs an internal employee. Here are three categories that \u201cprovide evidence of the degree of control\u201d in your employee\/employer relationship that will help you define whether the employee is W2 or 1099 (via the <\/span>IRS<\/span><\/a>):\u00a0<\/span>\u00a0<\/span><\/p>\n

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  1. Behavioral:<\/span><\/b> Does the company control or have the right to control what the worker does and how the worker does his or her job?<\/span>\u00a0<\/span><\/li>\n
  2. Financial:<\/span><\/b> Are the business aspects of the worker\u2019s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools\/supplies, etc.)<\/span>\u00a0<\/span><\/li>\n
  3. Type of Relationship:<\/span><\/b> Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?<\/span>\u00a0<\/span><\/li>\n<\/ol>\n

    Unfortunately, there\u2019s not one defined answer to decide if someone is an independent contractor or an employee. Typically you\u2019ll seek out a 1099 IC when you have a specific assignment that can\u2019t be accomplished by an in-house employee. Once the work has been performed, the assignment is over and the contractor moves on to their next client. Contractors have a fair amount of freedom and can set their own pay rates, working hours, etc.\u00a0<\/span>\u00a0<\/span><\/p>\n

    If you\u2019re looking for someone to work on a consistent basis where you have more control over employment-related factors like pay and schedule, a W2 employee is right for you.\u00a0<\/span>\u00a0<\/span><\/p>\n

    Classifications By Your Staffing Partner<\/span><\/b>\u00a0<\/span><\/h5>\n

    If you\u2019re partnering with a staffing agency, you must be aware of whether they\u2019re classifying their employees correctly or not. In a traditional staffing agency\/client relationship, the agency will hire temporary workers under the W2 classification. That means that the staffing partner is the employer of record and handles all the costs and paperwork associated with managing a W2 employee, such as:<\/span>\u00a0<\/span><\/p>\n

    But why would someone (accidentally or intentionally) misclassify a worker? Sometimes it may seem easier or more beneficial to utilize contractors for a W2 position. Hiring managers might be in a bind and need extra employees to account for seasonality or a last-minute request. Or they may think, \u201cI don\u2019t have to <\/span>pay<\/span><\/a> employment taxes or insurance.\u201d\u00a0<\/span> Or they may just not know how 1099 works.\u00a0<\/span><\/p>\n