Untangling the worker classification web: Are you hiring a contractor or an employee?

Why should employers pay attention to worker classification?

Correctly classifying workers as either independent contractors or W-2 employees is one of the most important decisions for business owners to make. While there are several differences between these two types of workers, the biggest (and most important to you as an employer) is the requirement to deduct the various payroll taxes from each W-2 employee’s paycheck, while 1099 independent contractors are responsible for filing and handling all their taxes on their own.

You’ll want to get this right to comply with federal labor laws. Misclassification can lead to unwelcome legal and financial consequences, including fines and back pay.

Once classification is figured out

Whether you’re a new entrepreneur or an established business owner, proper worker classification directly impacts your tax reporting requirements. Each worker type — employee or contractor — requires different tax documentation and withholding procedures. This means you’ll need to provide either a W-2 or a 1099 by January 31st of the following year.

Knowing which form to use

Employees should receive a completed W-2 by January 31, while independent contractors should get their 1099 by the same date. You should also be compliant if these are postmarked by January 31 as well. We spell out some of the less-than-ideal outcomes that can come up if W-2s are late.