Employee Vs 1099 Contractor

Ajay Kumar, CPA, MBA

A business may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes.

Here some of the factors that are used by the IRS and the state to determine whether an individual is an employee (W-2) or an independent contractor (1099).

  • Does the individual receive training from your company: Training a worker or by requiring the worker to attend meetings indicates that the worker is likely an employee?
  • Must the individual work set hours: The establishment of set hours of work is a factor indicating that the worker is likely an employee.
  • Is the work performed on company premises: If the work is performed on the premises that factor suggests control over the worker, especially if the work could be done elsewhere.
  • Is the individual paid by the hour, week, or month: Payment by the hour, week, or month generally points to an employer-employee relationship; on the other hand, payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
  • Is the worker free from suffering a loss or realizing a profit based on his/her work: A worker who can realize a profit or suffer a loss as a result of the worker’s services is generally an independent contractor.
  • Does the individual only perform services for your company: If a worker performs services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor.
  • May the individual terminate his services at any time: If the worker has the right to end his or her relationship with the employer at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.





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