June 15, 2020

Does your New Hampshire business have a new position to fill or a job that needs to get done? If so, you may be weighing the perks of a W-2 employee vs. a 1099 contractor.

Each hiring option has unique benefits and challenges. It can be difficult to determine which is the best choice for your company and the particular position you’re trying to fill. Add in the legal and tax implications, and it can become straight-up overwhelming!

That’s why BlueLion is here to walk you through properly classifying W-2 employees and 1099 contractors. We’ll answer your most burning questions, including:

  • Why is it vital to properly classify workers?
  • What happens if I misclassify an employee?
  • What exactly is the difference between an employee and a contractor?
  • What are W-2 and 1099 forms and how do I use them?

Why It’s Important to Properly Classify W-2 Employees vs. 1099 Contractors

Simply put: You MUST properly classify the people you hire because it determines how you and they are taxed.

Misclassification of employees as independent contractors is a significant issue throughout the American workforce and economy. Unfortunately, many employers do this in order to save money, since they don’t have to worry about things like benefits and minimum wage.

This is illegal and puts your business at huge risk. Employers who misclassify employees as freelancers can be subject to major financial penalties if audited by the Department of Labor.

ClassAction.com reports that:

“The most common lawsuit compensation for misclassified workers is back wages in the form of unpaid overtime and minimum wage. Under the Fair Labor Standard Act (FLSA), plaintiffs can seek liquidated damages and recover up to double what is owed to them.”

Additionally, the correct classification of workers relates to many labor standards, including:

  • Minimum wage and overtime requirements
  • Unemployment insurance
  • Federal and state payroll taxes
  • Business profits taxes
  • Compliance with workplace safety and health requirements
  • Workers’ compensation insurance

An individual must meet certain criteria set by the state of New Hampshire in order to be considered an independent contractor. Those who do not meet all of the criteria do not qualify as an independent contractor and are subject to the requirements of the law—and so are you when you hire them.

The NH Employment Security and the Department of Revenue Administration have their own tests for determining employment.

What is the Difference Between Employees and Contractors?

Before making a hiring decision, you should clearly understand the differences between a W-2 employee and a 1099 contractor. This way, you can consider the type of work you need and which type of worker is the best fit.

Who is an Employee?

You hire an employee under an employment agreement. This means you need to withhold taxes from their wages and may need to provide benefits, workers’ compensation, and the other items listed above.

You also determine when and how an employee works and what exactly they work on. This is obviously a benefit, as it means you have more control over the employee and can rely on them to be there and dedicated to your business.

One of the challenges (and the primary reason for employee misclassification) is you are responsible not only for your employees’ wages but also for paying your portion of their Social Security and Medicare taxes. You may also need to provide benefits like health insurance and paid sick leave. Then there are the additional costs, like office resources and job-specific equipment, which you will have to supply.

Who is a Contractor?

When you hire a 1099 contractor, you enter an agreement for them to work on a specific task or tasks. You are not on the hook for withholding their taxes or providing benefits; these are their responsibilities. Freelancers set their own hours and get the work done with their own tools. They also typically work with multiple clients.

Saving in areas like taxes and benefits is a major perk of working with freelancers. Independent contractors are also experts in their fields, require little training, and get the job done right while saving you time and headaches.

Because a contractor is not an employee, you don’t have much control over when and how they work. You also have to be careful when considering firing a contractor, as it could break the terms of your contract and lead to legal ramifications. There is also a chance that they could choose to sue your business should they get injured on the job (usually a nonissue with employees due to workers’ compensation).

What are W-2 and 1099 Forms and How Do I Use Them?

Now that you understand the difference between an employee and contractor and you’ve made a decision, you need to know the tax forms involved and how to use them.

A W-2 is a tax form you complete to report annual compensation your business has paid to employees and the payroll taxes you’ve withheld from that compensation. You are required to mail W-2 forms to your employees by January 31 of the following calendar year.

There are actually several types of 1099 forms, which are used to report payments you made to contractors.

  • 1099-MISC (Copy B): Complete and send to any contractor you paid $600 or more in a calendar year by January 31
  • 1099-MISC (Copy A): Complete and send to the IRS by January 31
  • Form 1096: Fill out the summary of all the 1099s you prepared and send to the IRS by January 31 (unless you filed your 1099s electronically)

BlueLion Can Help with Employee Classification

If you’re still unsure of the best course of action when it comes to hiring a W-2 employee or a 1099 contractor, BlueLion can help you make the right decision for your New Hampshire business. We will also make sure you and properly classify your employees, pay them appropriately, provide benefits when necessary, and handle their taxes correctly.

Our team is happy to guide you through the confusing world of hiring and ensure you maintain a happy and compliant workforce! Contact us at 603-818-4131 or info@bluelionllc.com today.

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.