Hiring help is exciting, but before small businesses bring someone onto the team, an important question must be answered first: Is this worker an employee or a contractor?
In this episode of Small Business Smarts, we break down the difference between W-2 employees and 1099 independent contractors, and why getting this right matters.
For more information, visit ADP.com/SPARK
Laci Buzzelli, vice president and general manager of small business services, ADP
If you run a small business, classifying workers correctly is a key part of staying compliant. Today, I'll break down the differences between W-2 employees and 1099 independent contractors and share some of the rules around employee classification.
The most important thing to know is that a business owner does not determine which workers are W-2, and which are 1099, based on their own needs. Federal and state agencies have created regulations that business owners must follow. So where do you start? At a high level, there are two ways you could classify your employees. One is employees or W-2 workers.
Two is independent contractors, sometimes called freelancers, or 1099 workers. Employees are generally economically dependent on the business for their work. While independent contractors are typically in business for themselves, serving multiple clients and controlling how they operate. W-2 employees are typically part of your everyday operations. Usually, the business owner sets their schedule and working hours, provides them equipment, and often a workspace.
W-2 employees follow internal policies, procedures and participate in trainings and team meetings. As the business owner, you withhold taxes, manage employee compliance, and if you offer health or retirement benefits, W-2 employees are eligible to enroll. For 1099 contractors. You agree on deliverables and they determine how they do the work. They usually have more of a flexible schedule and set their own hours.
They typically use their own equipment and sometimes even their own workspace. They also handle their own taxes and typically do not receive employee benefits. They're usually hired for specific projects or short term work. So you focus on the result, not how they get it done day to day. These factors are broad, and generally no one factor stands alone.
But ultimately you have resources. The IRS, the Department of Labor, the Equal Employment Opportunity Commission and individual states provide more detailed guidelines that can help business owners correctly classify workers. For more information, go to ADP.com.
