W2 vs 1099
Only payments to employees are subject to payroll taxes, therefore there is an incentive for a business to pay someone as an independent contractor (reported on form 1099) versus an employee (reported on form W2).
The IRS has regulations to prevent businesses from misclassifying employees. They consider the worker’s control and relationship to the business remitting payment. In short, to be an independent contractor the worker has control of when and how they work and does not receive benefits.
Employees normally:
- Work for one employer
- Hours are set by their employer
- Completes tasks in the specific manner the employer has requested
- Uses employers tools or equipment
Independent Contractors:
- Can work for multiple businesses
- Sets their own hours
- Has control over how to accomplish their tasks
- Incur costs associated with the job
- Uses their own tools or equipment
It is a common misconception that employees who make less than $600 a year are not required to pay payroll taxes. If they are classified as an employee, the business is required to withhold payroll taxes irregardless of the amount they earn.
Every scenario is different, therefore this general advice cannot be applied directly to your situation and is not intended to be tax advice. If you have concerns about the classification of 1099 vendors, it is best practice to consult with a tax professional.