1099 Insights

Classifying W-2 vs. 1099 Workers: What to Know for Tax Time

January 15, 2022
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Making the distinction between W-2 and 1099 workers has always been crucial for companies. But as independent contractors become more prevalent in every industry—and new tax changes take effect in 2022—businesses will be under increased scrutiny to correctly classify their workers. That’s because whether you have 1 or 100 contractors on your payroll, even one contractor requires you to follow slightly different tax rules. Ready to learn more? Read on for everything you need to know to classify 1099 contractors this tax season.

W-2 vs. 1099 workers: What are the actual differences?

W-2

A W-2 employee is what most people think of when they picture a traditional, full-time employee. Their W-2 form is what they need to file with the IRS at tax time, as it reports their income and all their taxes withheld. W-2 workers are often paid a flat salary or regular hourly wage and usually receive perks such as medical insurance, vacation time, and other benefits from their employer.

1099

A worker who’s not a traditional employee is usually considered an independent contractor. Requiring a 1099-NEC form for tax purposes, these workers typically have more control over how and when they complete their work. They are often paid on a job-to-job basis as opposed to a flat salary or hourly wage. 

Independent contractors are usually less expensive than employees for a business because there aren’t taxes or benefits to pay for. This can make it tempting to classify a worker as an independent contractor, but incorrectly marking an employee as a 1099 contractor is not something you want to do. Why? You could end up having to pay the back taxes owed for that individual, or be charged with a fine from the IRS or Department of Labor.

Luckily, the IRS has some helpful criteria for deciding whether a worker can be classified as a W-2 employee or 1099 independent contractor:

  1. Behavioral.  Who has control over when and how the worker completes their work? If your company dictates the specific hours and ways in which a person does their job, they are usually an employee—not a contractor. Similarly, if you provide all the equipment needed for someone to do their job, that’s another sign they are an employee and not a contractor.
  2. Financial. Is the worker paid a regular salary, or are they paid based on a specific contract? Contractors are paid by the job or for a set duration, not with a set amount each year. 
  3. Type of relationship. Does the worker only work for your company, or do they work for other businesses as well? Do they receive benefits like health insurance or vacation time? If a worker receives benefits from you and isn’t working for other companies they are likely an employee, not a contractor.

Changes to 1099 taxes for 2022

If you pay any of your contractors using an app like Paypal or Venmo (what is referred to as a “third-party settlement app”) there’s an important change to note for the 2022 tax season. There’s been a 1099-K threshold change which now requires those apps to report transactions for goods or services made by customers with $600 or more in annual gross sales on 1099-K forms. 

Currently, a 1099-K is only required if a user receives more than $20,000 in goods and services transactions and more than 200 goods and services transactions in a calendar year—so it’s a pretty substantial jump.

Now, if you pay a 1099 contractor more than $600 in a year via an app like Venmo or Paypal, those apps will send them a 1099-K form for reporting, and you’ll have to report those wages to the IRS as well. 

Simplify your 1099 payments and taxes

Whether you’re paying W-2 employees or 1099 contractors, Branch can help streamline the payments process (and even automate 1099-NEC filing for your contractors). Interested in learning more? Click below to learn about our solution for paying all of your workers with one streamlined solution.

See how Branch works

Disclaimer: This material has been written for informational purposes only—Branch does not provide tax or legal advice.

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