Employees vs. independent contractors
When you are classifying a worker, you can either categorize them as a W-2 (employee) or 1099 (independent contractor). This distinction is important because you are required to pay payroll taxes on wages paid to employees, while payroll taxes, withholdings and workers’ comp are generally not required for independent contractors. The problem is that, when it comes to determining who qualifies for a 1099 classification, the IRS has general guidelines which can be a bit unclear. It’s important that employees actually qualify for that classification because consequences for filing incorrectly are severe.
The risks of misclassification
If a worker is classified as a 1099, there can be issues if they are let go and file for unemployment. You could be opened up to paying back taxes if you didn’t properly classify your employees the first time, and the IRS is really cracking down. In reality, most temporary workers should be classified as W-2s because they are not skilled workers who could use a 1099 like nurses or other professionals, and it’s best to err on the side of caution.
As a staffing firm, you need to do your due diligence to make sure your workers are truly qualified professionals if you are classifying them as independent contractors. Otherwise, you will likely be forced to pay steep penalties from the IRS, and could even face criminal punishments.
If you need help determining your tax classifications, contact a member of our Back Office Operations team. We have an in-house tax department that is fully equipped to handle the burden of payroll tax administration, so you can focus on growing your staffing firm.