Jun 19, 2023
This is a popular topic for business owners and one that could have a significant impact on the business in the future. Why? Primarily because it could cost the business a LOT of money if a worker or workers (even worse) are paid and taxed incorrectly.
What, exactly, is the difference between a W-2 employee and a 1099 Independent Contractor? The IRS takes into consideration three main areas of control: behavioral, financial, and type of relationship. Let’s take a look at some of the practical differences between the two:
How they are paid:
Time and Attendance:
Control Over the Worker:
Severing the relationship:
Please keep in mind that this list and the quick summaries provided are far from all-encompassing of the rules between the W-2 and 1099 classifications. To dive deeper into this topic, please reference the IRS’ Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (https://www.irs.gov/pub/irs-pdf/fss8.pdf). The business owner or worker can complete this questionnaire to ensure the classification is correct and appropriate given the relationship's arrangements.
The short answer is it will cost the business a LOT of money, as mentioned above.
Typically, an error in the classification of workers is identified through an audit. The Internal Revenue Service will contact the business owner to advise that a flag was identified on the business’ records and that an investigation is being initiated. The investigation can be conducted via mail correspondence or an in-person examination of the records of the business and to hold interviews with key personnel. Form SS-8 will be a crucial component of the investigation, typically being voluntarily submitted by the business oner, or completed in person during an interview, to determine if workers were misclassified.
For the workers misclassified as 1099 Independent Contractors, the IRS will assess the withholding taxes that should have been tended to by the business and record those amounts as owed by the business. On top of that balance assessed, penalties and interest will also be assessed effective the date the taxes should have originally been paid. Remember that if the worker had been classified as a W-2 employee, the employee’s portion of the taxes would have been withheld from their paycheck and the business would have had those funds available to address the withholding tax obligations. With a misclassification situation, there is no way for the business to recoup those monies from the worker once the misclassification assessment is made, so this will cost the business a significant amount of money.
If you or your client are a business owner who has misclassified workers, there are options to preemptively fix the situation through two programs the IRS has implemented:
The Golden Lion Tax Solutions team has experience working through both of these programs with prior clients and can help bring the situation to a close with as minimal impact as possible given the business’ situation. With over 23 years of experience handling business and individual taxpayer account concerns, we are the best answer to this or any other tax account concerns you may have.
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Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.
For help with your tax debts, email firstname.lastname@example.org or call 833-LION-TAX (833-546-6829)
Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.