There are a number of different reasons why it’s important for construction business owners to understand the difference between a 1099 independent contractor and a W2 employee. However, before we can get into that we need to understand exactly what being a 1099 worker and a W2 worker entails.
1099 Workers
Self-employed workers or independent contractors are called 1099 workers, they are essentially freelancers or gig workers. Usually, construction businesses hire these gig workers to perform specific tasks in a project that they defined in their contract. These 1099 workers are independent contractors and as such decide for themselves how, when and where they will be working. They are also able to decide the tools and methods that they will use for the job. They may even hire workers of their own to assist them in the project. These independent contractors can include equipment dealers and other sub-contractors.
1099 workers are able to work for several clients at a time. Since these workers are self-employed you won’t have to file payroll taxes on their behalf or provide them with the same benefits as a W2 employee.
W-2 workers
W-2 workers are basically employees of a business, they can work both full time or part time. These employees have to work as per the schedule and policies of the company. These employees receive benefits like health insurance, paid leaves and overtime pay and are guaranteed at least the minimum wage set by the government.
You will need to file payroll taxes for your company’s W2 employees and withhold Social Security and Medicare taxes. Also, it is your responsibility to provide your employees with the tools and supplies that they will need to get the job done. Any worker that doesn’t classify as a 1099 contractor automatically falls into the default category of W2 employee.
Classification of Workers
It’s important to classify your workers correctly as it affects how you and your employees are taxed. With W2 employees you need to pay taxes on the wages that you pay to them and withhold income taxes however you don’t have to do the same for 1099 contractors.
If you misclassify an employee as an independent contractor it could lead to significant fines from the IRS or even a lawsuit against your company. Another thing that employee’s classification is important for, is determining the control that you have over the workers schedule and payment. Employees of your company will work according to the scheduling policies of your business whereas independent contractors can define for themselves how, when and where they will work.
It is important for business owners to understand the difference between these classifications. However, if you are still unsure which category your workers fall into, there are a few questions you can ask yourself to identify which classification they belong to.
Is the worker in control of his schedule or does the company decide how and when the worker will do their job?
Are you providing the worker with employee benefits like pension, insurance and vacation pay and will the relationship continue after the completion of the project?
Once you have the answer to these questions you will have an easier time determining whether your worker is a W-2 employee or a 1099 independent contractor. Although you should remember that there are different rules and regulations around worker classifications in every state. You cannot determine which category they fall into based on just one simple factor, you need to answer all of these questions and see what they indicate about your worker. Make sure to thoroughly document your final decision so there aren’t any problems or confusion later on.