For the purposes of this calculator, she doesn’t enter the extra hours she spends charting, maintaining her website, and keeping up with the latest mental health research. Arielle is a freelance writer who’s covered a range of topics including publishing, public transit accessibility, and freelance taxes. Her work has appeared in Electric Literature and She Writes and has been featured in Capital Currents. Arielle spends her free time on nature trails, thinking about what she’s going to cook for dinner and what she’ll write next.

• Sometimes, an employer/employee relationship may be more beneficial — even if the labor expenses are higher under this arrangement.
• These growing companies must also have sufficient funds to afford all employee expenses to prevent layoffs.
• (B) The person performs work that is outside the usual course of the hiring entity’s business.
• Use these forms to report payments to contractors and payroll tax withholdings from employees.
• Each of these industries is recession-proof, and will always provide jobs.
• Each employee receives this important form around every January and it’s used to prepare each his or her taxes.

Another factor to keep in mind is the at-will employment doctrine, which gives you the right to terminate employees at any time without notice or cause (as long as it doesn’t violate any federal or state labor laws). However, if you need to let a contractor go, it may not be as easy; you’ll have to abide by the terms of the contract you signed at the beginning of your relationship with them. The work a contractor does is typically well-defined and project-limited. They’re more likely to get paid per task than paid per hour, but can be paid by the hour depending on industry norms.

Using the W-2 and 1099 Forms to File Your Taxes

Employees and contractors are treated differently when it comes to federal labor law protections. Learn more about the different types of employees and what that entails in our guide. A W2 is a tax form issued to employees who earned more than $600 for the year by their employers after the conclusion of every calendar year. It reports the employee’s wages, commissions, tips and other compensation over a 12-month period.

Entities provide a Form 1099-Misc to independent contractors and Form W-2 to employees. However, there may be instances where a worker may be serving as an independent contractor and an employee for the same entity. A business might pay an independent contractor and an employee for the same or similar work, but there are key legal differences between the two. It is critical for business owners to correctly determine whether the people providing services are employees or independent contractors. Income tax rates for 1099 contractors and W-2 employees vary based on level of income and place of residence. W-2 employees pay 6.2% for Social Security taxes and 1.45% for Medicare taxes, and their employers match the same percentages.

What tax forms do I need to hire a 1099 contractor?

The last major notable difference between 1099 vs W-2 workers is how they are paid and the benefits to which they are entitled. Per IRS guidelines, employers are required to issue a Form W-2 to every employee who worked for them in a year by January 31 of the following year. This is w2 versus 1099 also the date when copies of W-2s must be sent to the Social Security Administration (SSA). “(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.