Business growth often means hiring employees. Since there is no manual for running a business, it can be difficult to know what type of employees to hire. Failing to pay an employee properly or issue the correct tax form can also have hefty financial ramifications. To help avoid any legal or financial issues knowing the difference between a 1099 versus a W-2 employee is a must.
1099 workers are a tricky subject in terms of employment. A true 1099 worker is considered a subcontractor or Independent Contractor. Subcontractors are not considered employees of a business. A subcontractor is typically a person or company hired to fulfill a temporary offsite role. Subcontractors can also be people like virtual administrators, IT or an answering service that perform the same functions for many businesses. These types of subcontractors are often self-employed, sole-proprietors or small businesses that offer one specific service.
1099 workers do not have payroll taxes withheld from payments for services. Payroll taxes are not withheld because 1099 workers are required to remit their own payroll taxes. Employers do not have to pay employer matching taxes on 1099 earnings.
A W-2 worker is the typical worker a business hires to help in the day to day operations of a business. If a worker is on-site meaning that they work every day at the physical business location, the worker is W-2. Other ways to know if a worker is a W-2 employee:
Employee works in a physical location used for business operations.
Employee is solely employed by one business.
Employe works from home and fulfills the same role, daily or weekly that is vital to the day to day operations of the business.
Employee is not self-employed.
Employee is the owner of an S-Corp or single member LLC.
Employers are required to pay employer matching taxes on employee wages when an employee is a W-2 worker. W-2 employees are also eligible to receive benefits like paid time off (depending on the state) and disability, worker’s compensation and unemployment.
Maintaining employees can be costly. When employing an on-site worker, employers are required to carry coverage like worker’s compensation that cover an employee if they are injured on the job. Employer matching taxes can also add up. Employers are required to match the funds withheld from employee paychecks for social security and medicare taxes. Employers are also required to pay additional state payroll taxes which are a direct expense to the business. Paid time off can sometimes be required by the state. For these and other reasons, some employers will try to classify employees as 1099 workers. There are many different ramifications for employers that misclassify workers. Employers send reporting quarterly to state and federal entities. Business also have to file payroll and income tax returns. Any independent contractor or subcontractor with earnings of more than $600 in a calendar year is required to receive a 1099 at year end. W-2 workers will receive a W-2 at year end showing earnings and taxes withheld.
Common issues that employers that misclassify employees will encounter:
Employee does not realize they have been classified 1099. Sometimes employees are unaware of the consequences of filing 1099, even if an employee asks you to classify them as a 1099 employee. Some employees only hear that they will not have taxes deducted from each paycheck. Unfortunately, the old adage nothing is certain but….is completely true. It is a terrible surprise to find that taxes are still due on an entire year’s worth of earnings at tax time.
Employee reports employer to state authority. Not all employee relationships end well. If an employee feels mistreated or angry they may lash out. All states have an employment agency that helps maintain employee/employer relations. If reported to a state agency, the agency may decide to audit your payroll records. If it is determined that a business failed to report W-2 employee wages, the business may be subject to payment of payroll taxes, penalties and interest. It should also be noted that the interest and penalties can go back years even if an employer is reported years later.
Employee is not eligible for disability or unemployment when needed. In light of recent world pandemic events, benefits like unemployment are critical. Additionally, a worker can be injured on the job any time any place. Misclassifying an employee can cost the employee necessary benefits during difficult times and the result…see #2. An employee reporting an employer is not the worst thing that can happen. An employee can sue at a later date for any number of reasons. The end consequences of a lawsuit can be devastating to a business and the owners of a business.
Loopholes close and laws change just ask Uber. Because Uber’s drivers are considered independent contractors, Uber saves millions per year in insurance and payroll tax costs. Uber drivers are also responsible for things like insurance, fuel and maintenance of their vehicles. Whereas a taxi company would be responsible for all of the above, Uber avoided this by deeming their drivers to be independent contractors. Recently the state of California sued Uber and Lyft. The result of this landmark lawsuit may cause sweeping legislation across many states to ensure that employers don’t abuse 1099 loopholes.
Overpaying taxes to the state and Fed. While it does not happen often, an employer may misclassify an employee in the other direction. Paying a subcontractor or independent contractor as a W-2 employee benefits only the subcontractor.
Many business owners are unaware that incorporation requires corporate compliance. When you incorporate you become a legal entity. Becoming a legal entity requires registering with state and federal agencies. Federal agencies will require a Federal Tax Identification number. State agencies will require employment ID numbers. Registration with any state or federal entity will require different forms of upkeep to keep your corporation compliant.
State Corporate Compliance
When you incorporate, you register the name you want to use with the state. The state approves your entity and assigns a corporate identification number. Once registered, the state will require you to file an annual report. Annual reports are part of corporate compliance. Annual reports are intended to update the state on changes to your corporation. If an annual report is not filed, you may be subject to penalties.
If you have employees, the state will require you to pay payroll taxes. Keeping compliant with state regulations for operating a business will also require compliance in the following areas;
Workers Compensation insurance coverage in case employees get injured
Registration for a sales tax ID number if subject to sales tax
Registration for an employer ID number if subject to payroll taxes
OSHA requirements for workplace and jobsite safety
Registration with state entities for specialized industries such as law, accounting, construction and health care
Reporting of newly hired employees to state employment agencies
Obtain a business license or occupational permit from your local city or county allowing you to conduct business in that area
Paying W-2 employees the required minimum wage
File annual income tax return for corporation
Federal Corporate Compliance
The federal government will not require you to file an annual report. The federal government will require the following to keep your corporation compliant;
File annual income tax return for corporation
Registration for FEIN (Federal Employer Identification Number)
Maintain accurate and detailed records of expenses and income
File annual employment tax forms 1099’s and W-2’s
File quarterly and annual employer payroll tax returns
When you incorporate it is a great idea to research corporate compliance in your state. Part of many incorporation services is help and advice regarding corporate compliance. Avoid fees and penalties from late filings by understanding what your state and government require to maintain your corporate protections.
If you need help with incorporation don’t hesitate to call us at 1-800-572-4419 or email [email protected] to get a quote for incorporation services. Feel free to subscribe to our blog for more accounting, tax, bookkeeping and HR tips.
When you begin hiring employees you are required by government entities to have them fill out paperwork. This is often referred to as new-hire paperwork. The paperwork you have your employee fill out will depend on what type of employee you hired.
A subcontractor is also known as a 1099 employee. For more about what a 1099 employee is please visit our post here: https://www.genesisaccountingsolutions.com/w-2vs1099/ 1099 employees must fill out at W-9 Form. You can find the federally required 1099 form here: https://www.irs.gov/pub/irs-pdf/fw9.pdf Make sure that if you search for the W-9 form online, you obtain it from the IRS website. Many other sites will sell you a pdf fillable form when you can get it for free from the IRS. Subcontractors do not need to fill out any state forms.
W-2 employees tend to be any workers that work in your physical place of business. Employers are required to pay matching taxes on W-2 workers. Employers are also required to run pay for W-2 employees through payroll. W-2 employees must fill out paperwork according to federal requirements. Proper employee paperwork establishes an employee’s citizenship and identity. The US Federal government requires employees to fill out a W-4 which you can find here: https://www.irs.gov/pub/irs-pdf/fw4.pdf and an I-9 which you can find here: https://www.uscis.gov/i-9
Other paperwork that your W-2 employees should submit within three days of being hired;
Either a copy of the employee’s drivers license and a copy of the employee’s social security card/or a copy of the employee’s birth certificate or a copy of the employee’s passport will cover both the requirement to establish citizenship and identity.
A copy of the employee’s insurance policy card if the employee will drive a company vehicle.
Research your state, they may have a special tax calculation that will require its own form.
An authorization from the employee to conduct a background check if your company handles sensitive information or requires background checks.
An employment application that shows the employee’s background information and employment history and 1 to 2 emergency contacts.
Offer letter if your company wants to outline the position and terms of employment.
If you have further questions about employee paperwork or need other bookkeeping and accounting services, please feel free to contact us for a free consultation at 800-572-4419 or email [email protected] Subscribe to our blog today for more useful information about accounting and HR.
As we head into tax season it is beneficial to know about your itemized and standardized deductions. What is a standardized deduction? Your AGI or Adjusted Gross Income is the amount used to calculate what taxes you owe. To arrive at your AGI the sum of your earnings minus any deductions or tax credit is used. The standardized deduction is the minimum amount the IRS will allow you to deduct from the sum of your earnings to arrive at your AGI.
Itemized deductions & Tax credits
What is an itemized deduction? Itemized deductions are specific expenses that the IRS allows you to deduct from your income to arrive at your AGI. Tax credits are a dollar reduction in the overall amount you owe. For most people the amount of the standardized deduction will be more than the sum of all itemized deductions. You can take either the standardized deduction or the sum of your itemized deductions but not both.
2020 Standardized deduction List
Standard or Single deduction
Married Filing Jointly
Married Filed Separately
Head of Household
If you need someone to file your personal or business taxes feel free to email us at [email protected] or call 800-572-4419 for a free consultation. We specialized in virtual bookkeeping and accounting services and also offer tax preparation and filing.