When a worker is paid on Form W-2, the employer withholds the necessary employee taxes, including Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). The employer also pays the necessary employer taxes such as FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).
Workers paid on Form 1099-misc do not have taxes withheld from their pay, so they must file and pay the appropriate taxes themselves. The company does not pay the employer share of taxes, and the worker does not have access to the company’s unemployment, Workers’ Compensation, or benefits [medical, dental, vision, 401(k), etc.].
The IRS and state agencies have seen their tax collections suffer due to workers misclassified as 1099 independent contractors and are cracking down with more audits and heavy penalties. Therefore, it is imperative workers are properly classified per the IRS guidelines. Based on those guidelines, less than 1% of our contractors qualify for the 1099 independent contractor (IC) classification.