W2 Employee Or 1099 Independent Contractor? A Quick Primer
While the freelance economy is booming, many businesses are still trying to wrap their heads around this new world of work. A healthy chunk of these businesses seem to be struggling with a similar challenge when it comes to managing their independent workforces: worker classification.
According to a recent study from the ADP Research Institute, more than one-third of midsize businesses have been fined or penalized for not complying with laws pertaining to how they manage their workforce. Of those fined, 58 percent did not know how much the fines cost and 47 percent did not know how many times they were fined.
Businesses utilizing independent workers need to ensure they remain compliant with state and federal regulations. Those that don’t risk being penalized with fines from the IRS. So how do you know whether to classify your workers as W2 employees or 1099 contractors?
Well for starters, with a W2 employee you’re required by law to: withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You don’t generally have to withhold or pay any taxes on payments to freelancers and independent contractors.
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