One question that is commonly asked by the business owner is what is the difference between issuing a W-2 and a 1099-MISC?

A W-2 is issued to your "employees". When you have employees, the company must have payroll. With this, you would be responsible for issuing paychecks, filing quarterly and annual payroll reports, etc. The company pays their share of payroll taxes through quarterly reports and the employees' share of tax due is withheld from their paycheck. At year end, the employee has already paid some taxes on behalf of the income that they have made.

A 1099-MISC is issued to a "contract laborer". There is no tax withheld. If you are required to issue this person a 1099, you would need them to fill out a W-9 which will provide you with the necessary information to issue the 1099 at year-end. There are exceptions on who needs to be issued a 1099-MISC. It depends on the amount you paid them (usually would be over $600) and what they actually did. If you are not sure on whether or not you will need to issue them a 1099-MISC, we suggest having them fill out the W-9 just in case.  We have seen that it is much harder to get this information after the fact. Also, these must be issued by a certain date after year-end (1/31). You do not want to be scrambling around trying to get the necessary information to issue.

On making the decision on whether you have employees or contract laborers, it all comes down to scope control. Are you requiring the worker to be there on a set schedule or do they make their own schedule?  Do you supervise them or let them operate completely autonomously?  Do they perform similar duties for other companies?

I will give you examples. Let's say you own a flooring company. A receptionist is required to be in the office Monday-Friday, 8am-5pm would be considered an employee. Whereas, a person that you hired to complete various flooring jobs throughout the year, but that came with their own equipment and was on their own schedule would most likely be a contract laborer.

Be sure that you know the difference and issue W-2's and 1099-MISC's accordingly. If you are doing the incorrectly and get audited, there would be a hefty price to pay. This is an area of focused enforcement at both the federal and state level so be sure that you get it right.  Please contact us if you have any additional questions.