Employee – A person who works in the service of another (the employer) subject to a contract, where the employer controls the conditions of the work.
Contractor/Self-Employed – A person who agrees to provide services to another party, but who retains significant or complete control over how the work is done.
W-2 (See one HERE) – The W-2 form is the form that an employer must send to an employee and the IRS at the end of the year. The W-2 form reports an employee’s annual wages and the amount of taxes withheld from his or her paycheck.
1099-MISC (See one HERE) – Form 1099-MISC is a tax form that reports the year-end summary of all non-employee compensation.
WHAT'S THE DIFFERENCE?
Simply put, W-2s and 1099s are two separate tax forms that two different types of individuals and, in some cases, businesses will receive after the end of the tax year for their pay received during that year. If you’re considered an employee, you will receive a W-2. If you’re considered a contractor, you will receive a 1099-MISC.
So what’s the big deal? The company you worked for is going to send you a tax form; it’s either going to be a W-2 or a 1099-MISC. There are some differences between the two tax forms that will affect your tax situation for the year. As an employee, federal, state and payroll taxes are automatically deducted from your paycheck. Yes, that’s why your paycheck is a bit smaller than you were anticipating. As a contractor, you are responsible for your own taxes. You will either submit these taxes quarterly to the government or at the end of the year in the form of self-employment tax.
How do you know whether you are being considered an employee or a contractor?
Are provided the tools, materials and equipment necessary.
Have only one employer.
Have an assigned work schedule (Typical 9AM-5PM).
Complete work that is assigned by a manager.
Employees have very little control over their own work, but the benefit comes from having stability and benefits.
Supply their own tools.
Have multiple clients.
Set their own schedule.
Complete work that they choose, and turn down projects they don’t want.
Contractors have more control over themselves and do not have as much contact with the company they are providing services for.
THE KEY TAKE-AWAY
Come tax time there is a major difference. As a contractor, if you supply your own tools, materials, or equipment, you are able to deduct those expenses to lower your taxable income. For a list of deductible expenses check out Part II of the Schedule C. There are certain expenses employees can deduct as well, but the restrictions are much more rigid. Talk to your tax professional to see if you qualify to deduct expenses as a W-2 employee.
This article is for informational purposes only. You should consult legal advice when trying to determine the status of your employee or independent contractor.