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The Difference Between 1099 Workers and W-2 Employees

February 06, 2015  |   Tax News,Tax Tips   |   Tags: , ,  

Many companies prefer to hire contractors instead of full-time employees to minimize expenses. The tax code differentiates between contractors and full-time employees. They are required to file different tax forms, and prepare their taxes differently.

1099 or w2

Who are 1099 workers?

Contractors are workers that determine where they work, when they work and how they work. For example, if you hire an independent gardener for a day, he will be considered a contractor because he is free to decide how he does his work. He uses his own tools and directs himself on how the work must be done. The job of the employer, in such a case, is to instruct the gardener on the end result they want, and not how the end result must be achieved.

Contractors usually have more than one employer and are considered independent workers. Therefore, they are required to pay their tax themselves. The employer is required to file a copy of the 1099 with the IRS for each contractor that is paid more than $600 for a year, and also send one copy of the tax form to the contractor. Based on this copy, the contractor calculates the total payroll and other taxes, and files his or her return.

Who are employees?

Employees, on the other hand, have less control over where they work, at what time and how. Those hired by companies as full-time workers are considered employees because they spend the designated time in working at the place provided by the employer. Usually, the employer decides the place, time and method of working.

Employees typically do not file their taxes themselves. Their employer withholds payroll taxes from their paycheck every week to file taxes on their behalf.

Filing Tax Returns

Contractors are required to file 1099s, while most employees are required to file W-2s. These are two different tax forms, and cannot be used interchangeably. If a W-2 employee does not have income from other sources, then they will only use the W-2 from their sole employer. Their employer reports their income and taxes to the IRS.

A 1099 worker may have income from various employers, and need to prepare their own taxes using several forms. Contractors that use their home for work, such as an office, are able to deduct certain expenses for utility bills, phone bills, and Internet costs. These costs can only be deducted if they are used for the home office.