If you’re a business owner, you need to understand the difference between employees and independent contractors. Not only is the understanding of the difference between employees and independent contractors crucial for tax purposes, but also to avoid legal and financial consequences. While 1099 workers can bring specialized skills to your company, reduce costs, and help your business expand, willfully or inadvertently misclassifying employees as independent contractors can result in significant penalties. The Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) both have their own criteria for distinguishing these workers.     

Who is a 1099 Worker?

A 1099 worker is also known as an independent contractor, self-employed worker, freelancer, or contract worker. Unlike employees, who receive W-2s, any compensation over $600 each year is reported on a 1099-NEC for these workers. 1099 workers are self-employed and in business for themselves — they provide specific services to a business and are not on the company’s payroll.  

The workers your company uses can depend on the needs of your business. Using 1099 workers can come with many advantages for a company, especially for start-ups. Contract workers can offer flexibility to meet market demands, keep overhead low, and increase efficiency. Employees can often provide more stability and give the employer control over how the work is being performed.   

Distinguishing Independent Contractors and Employees 

The main difference between an employee and an independent contractor is the relationship with the employer — and the way the worker is treated by them. While there are several areas that should be evaluated to determine whether a worker is an independent contractor or employee, these areas should be compared:

• The employer’s control — One of the most critical distinctions between a W-2 employee is the amount of control the employer has over the worker and how their tasks are carried out. With a W-2 employee, an employer can oversee how the work is being done and direct the results. If a worker is an independent contractor, the employer can rarely dictate the methods used in conducting the work or how it will be done.   
• Payroll taxes — A 1099 worker is responsible for handling their own taxes and must make quarterly payments during the year. A W-2 employee’s taxes are withheld by the employer and taken out of each paycheck.
• Benefits — Employees may receive certain benefits such as health insurance, vacation time, retirement plans, and other perks. Independent contractors must usually pay for their own health insurance and rarely receive company benefits.
• Duration of the relationship — Employees usually have an ongoing relationship with the employer, while independent contractors may work on a per-project basis or for a definitive amount of time.
• Employer liability — An employer may assume liability for the actions of their employees. Independent contractors are usually considered their own business entities. This means that an employer would rarely be held vicariously liable for any negligent acts committed by them.

If an employer misclassifies an employee as an independent contractor, they can be held liable for the employment taxes for that worker and incur financial penalties from the IRS. In addition, other penalties may be assessed for minimum wages violations and unpaid overtime under the Fair Labor Standards Act. 

Contact an Experienced New York Business Law Attorney

If you’re a business owner, it’s essential to have a knowledgeable attorney by your side who can best advise you regarding legal and regulatory compliance when it comes to using independent contractors. Offering reliable representation and high-quality legal services, Brinen & Associates assists clients with a broad scope of business and corporate matters. Call (212) 330-8151 or send us a message to learn more about how we can assist you.