In this article, we help you understand the difference between 1099 contractors and W-2 employees, and how a Vendor Management System can assist your company in complying with workforce laws and regulations when managing your contingent workforce.
What is the difference between 1099 and W-2 Employees in Contingent Workforce Management?
If your business is based in the US, or has facilities located in the US, then it’s likely that you’ve come across the terms W-2 employee and 1099 contractors during the hiring process.
Essentially, 1099s and W-2s are simply the tax forms that employers use to report wages and taxes for different categories of workers. In the management of your contingent workforce, and hiring non-employee workers within your organization, it’s crucial that you understand the difference between these two workers.
What is a W-2 Employee?
A W-2 worker is an employee of the organization they work for. These employees can be full-time or part-time, and work according to the schedule and business policies of the company that employs them.
Since they are an employee of the organization, they are entitled to employee benefits such as vacation time, retirement plans, and sick leave. Employers are required to withhold Social Security and Medicare taxes for W-2 employees, as well as file payroll taxes.
What is a 1099 Worker?
Unlike W2 employees, a 1099 worker is a self-employed worker or independent contractor. These types of workers are hired by companies to provide specific services for a specific project or designated period of time, as defined in a written contract.
Since 1099 workers are self-employed, they have the ability to define when, how and where they work from. They also can decide what tools and methods they use to complete that work, as long as they meet the deliverables of the business that’s hiring them.
Independent contractors are able to serve multiple clients at one time, and since they are self-employed they pay their own taxes and provide their own benefits. Employers must send a 1099-MISC tax form to these workers.
How to determine whether your workers are 1099 or W-2 employees
Understanding the differences between these two categories of workers is a crucial component of ensuring your organization doesn’t misclassify an employee as an independent contractor.
Misclassifications can lead to W-2 workers who are misclassified as independent contractors suing your business for the benefits they were denied (such as vacation pay, overtime, health insurance etc), as well as other costly fines and legal fees for your organization.
That’s why it’s important that your business classifies its workers correctly.
Here are a few questions that will help you get a clearer understanding of whether a worker falls under the W-2 employee or 1099 contractor category.
1 - Do you control how they do their job?
Independent contractors are self-employed, meaning they can work from where, when and how they want. Unlike a W-2 worker who works for your organization, a 1099 independent contractor has far more freedom about how they deliver on the written contract. If you have control over how a worker works, it’s likely they fall under the employee category.
2 - How do you pay the worker?
Unlike W-2 employees who are paid a salary, independent contractors are usually paid by the job or for a specific period of time. Independent contractors certainly are not classified correctly if they are on your company’s payroll.
3 - How long have you hired the worker for?
Independent contractors come and go from your organization depending on specific projects. After a project has been completed, they are able to work on different projects and with different organizations. If you are hiring an independent contractor long-term, it’s important to make sure that they aren’t accidentally falling into the employee category.
Most local jurisdictions have their own laws and regulations on how workers are categorized. To ensure you classify your workers correctly, most jurisdictions have online tests that will help your organization determine which category a worker belongs to.
Use a vendor management system (VMS) to ensure compliance
Managing a contingent workforce program can be incredibly complex, particularly when your company doesn’t have the tools in place to ensure it has complete control over its non-employee workers and the vendors associated with it.
Thankfully, the use of a vendor management system (VMS) makes this easy. A VMS acts as a centralized platform, giving you complete visibility into managing your contingent workforce and mitigate contingent workforce compliance risk. Through proper documentation of your non-permanent workforce, your business will ensure it doesn’t misclassify independent contractors or temps.
Want to learn more about how a vendor management system can ensure your company correctly classifies its employees?
Contact Conexis VMS today. We would love to answer any questions that you may have.
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