Employee vs Contractor: Which is correct?

[KarenL]

As a business owner, it’s important to know how you should treat payments you make to the people who work for you. The simplest explanation is that an “employee” has taxes withheld from their paychecks and receives a W-2 at tax time - while “contractors” receive a Form 1099-NEC (and are considered self-employed). In reality, the IRS has some common law rules on whether a worker is an employee or an independent contractor.

These rules are generally based on how much control an employer has over the work and the type of business relationship. As a business owner, if you’re not sure how to classify your worker, the IRS will happily step in on your behalf and make the determination for you. If you get it wrong, your worker can reach out to the IRS themselves and have them “take a look” at all the facts and circumstances of your business relationship. That can be time-consuming and costly so it’s best to get it right from the start! 

Resources for Business Owners:

• What is Form 1099-NEC? - All about the 1099-NEC!
• The Difference Between a 1099 and a W-2 Tax Form - Easy to understand differences.
• Form W-9 - What Is It and How Is It Used? - The must-have form before paying independent contractors.
• What is Quick Employer Forms? - The tool to file your W-2 and 1099-NEC forms & more.
• How do I create W-2 and 1099 forms for my employees or contractors? - How to get there if you’re using TurboTax Online or TurboTax Desktop.
• Can TurboTax handle W-2 and 1099 forms for a large business? - You’re good for up to $10 million worth of forms to report for the year.
• On-Demand Jobs and Your Taxes
• The Self-Employment Tax - Make sure contractors are aware they need to pay self-employment taxes.
• A Guide to Self-Employment Taxes for Contractors, Freelancers, and Beyond [Infographic] - Nice graphic on how the self-employment tax works. Great to share with your contractors.
• How to File Taxes as an Independent Contractor: Tax Forms, Deductions, and Credits for Freelancers - More on how your contractors will file their taxes.

If you need tax advice or have questions that aren't answered in the links above, please ask in our Taxes forum that best fits your needs!