Starting Your First Business? What Would You Do Hire An Employee, Independent Contractor Or Both?

When you start your business it often becomes difficult to understand employee taxation from the owner’s perspective. As an employee, you were given a W-2 and your employer has deducted your state and federal taxes and submitted it to the state on your behalf. You find out the tax deducted from your W-2 and you file it with your personal tax returns.
The process of taxation is more complicated for a business owner. The business owner will have to decide whether each worker is an employee or an independent contractor. The owners must deduct taxes on employee wages and calculate tax percentage on company profit.
Understanding the differentiation between 1099 and W-2 is importantBusinesses have workers who can be classified as either employees or independent contractors. This differentiation is important as it influences how the income tax is deducted and paid.
According to IRS rules, the employer has to decide whether a worker is an employee or an independent contractor. The guidelines also lay down the extent of control the company has on the worker with respect to what the worker does and the way he does his work. If the company has less control over the worker more often than not, he will be considered an independent contractor.
Businesses must deduct federal, state and other taxes from the employee’s wages and submit it to the concerned tax authority.  On the other hand, independent contractors are responsible for filing their own federal and state taxes.
For example, suppose PlatinumGold Productions hires Ronnie as a freelance producer. In turn, Ronnie hires a cameraman, writes the script, plans and executes the video shoot and edits the video that has been shot. As the producer controls all work related to the shooting of the video, Platinum Productions’ Certified Public Accountant (CPA) will regard the producer as an independent contractor and hence no worker taxes will be deducted by the company.
If Platinum Productions also hires Ronnie as an assistant to the company president and the president carefully manages Ronnie’s work, then the CPA may decide that Ronnie should be considered as an employee.
We hope this article was helpful to address your doubts related to 1099 and W-2..