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  • Writer's pictureYuri Kapilovich, CPA

W-2 VS 1099 classification

So lets talk about it: 1099 vs W-2, what is the difference and why does it even matter?

It is no secret folks, when you hire someone to help you out in your business (whether it is bookkeeping, social media, admin, etc) the easiest thing to do is make them a 1099 contractor and give them check, zelle, venmo, etc and then give them a 1099 at the end of the year. Why is it easier?

1️⃣ You just give them a check based on their hours.

2️⃣ They do not fill out too much paper paperwork, no W-4s, no dependents no benefits analysis. Just a W-9 and get to it.

3️⃣ You do not have to pay them benefits, no health insurance, no dental, nothing. Just their hours X hourly rate. Bada bing bada boom.

4️⃣ In short, you push all the tax responsibilities on them, you get the write off, and they deal with the self employment tax implications on their returns.

The workers like it because they get write stuff off against that income and you, as a business owner, like it cuz its easy. Now lets talk about paying someone as a W-2:

1️⃣ They fill out all the paperwork, sign employment agreements and get on a monthly payroll

2️⃣ You typically have to pay benefits, unemployment insurance, Family leave (in NJ), employer share of FICA, FUTA, etc.

3️⃣ If you want to retain them, profit share/401k, medical, dental and all those benefits should be offered.

4️⃣ You must have the funds on a monthly basis to make these payments as they are automatically debited. At the end of the year, W-2s are issued with taxes withheld and things are a bit easier for the employers.

Now, as you can see, there are plenty of benefits from the owner's perspective of paying their workers with a 1099 over W-2 because its just simpler and the costs are reduced around payroll and such. Welp, that is also the reason why states pursue the classification and perform audits. They want to make sure you are not taking advantage of someone who should really be a W-2 but you do not feel like giving them benefits, pay into Unemployment insurance and Family leave. So what constitutes a W-2 employee rather than 1099:

A. The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and

B. The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and

C. The individual is customarily engaged in an independently established trade, occupation, profession or business.

In short, when you start and as long as you do not exhibit control over the schedule and how your workers work you can 1099 them from the start. Be cautious when you have crossed the ABC test above and consult a professional when in doubt.

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