In this economy, many businesses are trying to cut back on full-time staffers by hiring contractors to do the same work instead—minus the expensive benefits. As a result, it can often be difficult to tell employees and contractors apart. But there are significant differences, both in terms of workers’ personal bottom lines and in the eyes of the IRS.
To better understand the nuances between the two designations—and what to do if you think you’re being misclassified—we talked to Jaime Campbell, a CPA with 10-plus years of experience.
1099s and W-2s: Breaking Down the Difference
Simply put, 1099s and W-2s are two separate tax forms for two different types of workers. If you’re an independent contractor, you get a 1099 form. If you’re an employee, you receive a W-2.
As a W-2 employee, payroll taxes are automatically deducted from your paycheck and then paid to the government through your employer. If you’re a contractor, you are responsible for calculating your own payroll taxes and then submitting the sum to the government on a quarterly basis.
RELATED: 10 Tax Filing Mistakes to Avoid
How to Determine the Correct Job Status
When it comes to who should be classified as an employee and who should be considered an independent contractor, Campbell says that the key word is “control.” In other words, “it’s all about who controls the work you do,” she says.
If you’re an independent contractor, you likely:
- Set your own schedule.
- Use your own personal method for finishing assignments.
- Accept tasks on a case-by-case basis—and can turn down offers of work.
- Supply your own tools.
- Have more than one client.
Basically, if you do your job well and finish it on time, the company usually doesn’t have much contact with you while you’re working.
If you’re an employee, you likely:
- Have assigned hours or a set schedule.
- Get trained by the company in a certain method.
- Complete any and all work assigned to you by a manager.
- Are provided the tools and materials necessary to finish your work.
- Have only one employer.
Compared to contractors, employees usually have relatively little control over their own work—but they do generally have stability and benefits, with one of the most important ones being health care.
Contractors, however, are totally on their own when it comes to benefits, but there’s one plus for this group come tax time: If you supply your own tools and materials, you’re able to deduct those expenses, says Campbell. That laptop and cushy office chair you just bought? Both deductible.
“You also have the right to deduct certain expenses if you’re a W-2 employee, but the restrictions are much higher,” says Campbell.
Think You’re Being Misclassified?
If you feel like your own job falls somewhere between contractor and employee, you're not alone. The Treasury Department estimates that employers nationwide misclassify millions of workers as independent contractors instead of employees, thus avoiding having to pay employment taxes.
“Just violating one of the rules probably won’t boot you into the other category,” says Campbell. “It’s when you violate enough of them that you should probably be reclassified as a W-2 employee.”
If you feel like your client is exerting too much control over your workflow for you to be properly considered a contractor, Campbell says that it’s important to act. While you might not feel comfortable bringing it up, she says, “the company is at risk for penalties and fines if the state does a 1099 audit and determines that you’re really an employee.”
Campbell suggests reaching out to both your client’s HR department and the manager handling your work. “Explain that you’ve been giving up control over your workflow, and you’re not receiving anything in return, like benefits,” says Campbell.
Then the company will generally have two options: Either they’ll have to release control, increasing your freedom over your work and schedule, or they’ll have to reclassify you as an employee and start providing you with the benefits, tools and infrastructure due to employees.
This story was updated on February 16, 2017.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.