As the deadline for filing taxes in the United States approaches, employees around the country begin receiving the forms they need to complete their tax returns. And throughout this process, workers within the same company may receive two different tax forms — one might receive a W-2 form, and the other may get a 1099 form. Both forms record the amounts of money the respective individuals earned, but they differ to reflect the type of work each person performed for the company and their professional relationship with that business. The 1099 is specifically for a type of worker called an independent contractor, and the W-2 is designed for traditional employees.
If you’re unsure how to classify the nature of the work you’re doing for a business or the role you have in the company, it’s important to learn more about the differences between employees and independent contractors. The distinction does matter, especially when it comes to tax matters. To learn more, take a deeper dive into the details of what independent contractors are and the ways they differ from traditional employees.
What’s the Difference Between Contractors and Employees?
Employees and contractors both perform work for businesses, but contractors work for themselves, whereas employees work directly for the business. Traditional employees earn wages and are on a company’s payroll, and they receive benefits like health insurance in exchange for agreeing to abide by the business’ rules. Independent contractors, on the other hand, typically have much more flexibility in how they work and what they work on. They might be hired only for a specific period of time or to complete a specific project. In exchange for this freedom, they don’t receive benefits from the company, and they may be paid a flat rate instead of hourly wages or a salary.
This distinction is important when it comes to withholding and paying taxes. Businesses are required to withhold income, Social Security and Medicare taxes and pay them to the IRS on behalf of traditional employees. They don’t make these tax payments for independent contractors, who are required to pay self-employment taxes on their earnings.
Some employers may also have benefit-related withholdings that they forward to private businesses, such as health insurance or retirement accounts. At the end of each calendar year, contractors receive an accounting of all the wages they’ve been paid on a 1099 form. Employees receive the same information on a W-2 form, which also displays the amounts of money that the business has withheld from their checks.
How to Tell if You’re an Independent (1099) Contract Employee
Certain elements of your working relationship with a business help to classify you as an independent contractor. The IRS differentiates independent contractors based on three categories: behavioral control, financial control and the nature of the relationship. Contract employees have more behavioral and financial control over their work than employees do.
Behavioral control involves the level of oversight and direction that the business has on your work. Traditional employees are assigned tasks they must complete, whereas independent contractors have the option of accepting or rejecting work. An employee may be told they’re required to work from 9 a.m. to 5 p.m. on Mondays through Fridays and can face consequences if they regularly fail to meet these standards, but a contractor can choose when and where to work as long as they complete tasks by certain times. Regular employees often also must participate in periodic evaluations that measure their progress over a length of time. An independent contractor may be asked to complete a project by a certain date, without the expectation of extensive feedback on their work or evaluations of their performance.
Financial control involves the way money flows in your working relationship. Businesses typically cover most or all expenses for their employees, but independent contractors are more likely to be expected to pay expenses they incur in completing work for a business. They may be expected to provide their own supplies or equipment, such as the laptops they complete work on. Employees receive regular paychecks at a set frequency, but independent contractors may only receive payment when a job is completed. The timing of payment may follow an accounts payable cycle rather than a biweekly payroll schedule.
The nature of the relationship is also a key factor in determining the nature of your working relationship. An independent contractor’s relationship may begin with a contract, but an employee’s relationship is more likely to begin with a job offer. Businesses don’t usually offer any benefits, such as insurance, paid days off or retirement accounts, to independent contractors. However, employees are more likely to receive at least one type of these benefits. Employment relationships last until one of the parties ends them, but relationships between a business and an independent contractor are finite — they’re normally tied to the end of a project or time period.
What to Do If You’re Misclassified
When you give your time and effort to a business in exchange for money, it’s important to know whether you’re classified as an employee or a 1099 contractor. Misclassification can have serious consequences. If you’re a contractor but believe you’re an employee, for example, you might be working under the assumption that the business is withholding tax money on your behalf, so you wouldn’t set aside funds throughout the year to cover self-employment tax payments. That could result in unwelcome surprises when you prepare to file your return. On the other hand, say you’re an employee but believe you’re a contractor. You could miss out on employee benefits, such as health insurance coverage and retirement savings account matching, that you’d want to take advantage of. Also, employees can receive worker’s compensation, but independent contractors are not covered.
Should you determine that you’re misclassified, you can still get properly classified. If you feel comfortable doing so, the simplest method may be to approach either a direct manager or a representative from the company’s human relations department to discuss your concerns. In some cases, you may be able to reach a satisfactory resolution this way.
In some circumstances, however, you might not feel comfortable approaching someone directly. In that case, you can provide information to a representative at the IRS, and they can give you an official determination about how the organization classifies your working role. To get this determination, submit a completed copy of Form SS-8 to the IRS. Be aware that the IRS has a lengthy turnaround time; it can take up to six months to get answers. In the meantime, it’s still up to you to make sure you file your taxes properly.
If you’ve already filed taxes based on what you think your classification is and the IRS views your role differently, you may need to amend your most recent tax return. Although it’s an added cost, discussing this process with an experienced tax attorney can help you avoid potential missteps. It can also help to contact your local labor board. Typically, labor boards have the authority to conduct hearings and enforce the decisions made during those hearings. In some cases, a formal lawsuit may be necessary to get the right classification and any benefits that go along with it.
If you’ve been misclassified as an independent contractor, you can use Form 8919 to calculate how much of your wages should have gone towards Medicare and Social Security withholdings. Your employer will pay these withholdings at tax time, and this protects your financial interests.