How can you tell the difference between an employee and a contractor? This is a common question many business owners have.
Let’s shed some light on the murky matter and hopefully clear up any confusion you may have.
The IRS defines an employee as anyone who performs a service where the employer controls both what is done and how the duties are performed.
An independent contractor isn’t bound to any employer and is free to work for as many businesses as they desire. While you can control the expected result, you’re unable to control what the worker does to deliver the service or product.
As far as forms go, an independent contractor will receive a 1099 form from you (the business owner) while an employee gets a W-2 form.
The primary difference between a W-2 vs 1099 is that a W-2 includes withholding information.
Since you’ve withheld taxes throughout the year and paid them to the IRS on behalf of your employees, they need to know the total amounts, so they can file their returns in an accurate and timely fashion.
Businesses aren’t required to withhold taxes for independent contractors who receive 1099s.
The forms include boxes to indicate tax withholding in the event an employer withholds tax payments at the contractor’s request. In most instances, the number in this box will be $0.00 because it’s extremely rare for an employer to withhold tax for contracted work. It requires additional accounting on behalf of the business and no one wants to do extra work.
If you are still confused about what forms you will need, please reach out to us. We are always glad to answer questions.