“Independent Contractors” are paid on 1099s. When and independent contractor is paid by their client, they do not have any of the federal taxes taken out at the time of payment. That doesn’t mean you don’t have to pay them, they’ll still be due at the end of the year. In fact, a 2011 article from Forbes says that you’ll end up paying more in taxes being paid on a 1099 than a W2.
1099 contract versus W2 employment
If you’re paid on a 1099, you’re not an employee, you’re a contractor. By paying you as a contractor, they don’t have to pay certain taxes, and it can save them money. The employer/client can kind of use this to take advantage of the employee/contractor, by making the receiver of money pay taxes they would otherwise be held accountable for. To put a stop to that, the IRS has set rules about what is an employee vs independent contractor.
Who is an Independent Contractor?
*If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
*If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
W2s, on the other hand, are how employees are paid. Whenever you’re paid, money is withheld from your check as you ask for it to be on your W4. Employers end up paying some of these taxes, too, giving some incentive to pay as many people on 1099s as they can, instead of W2s.
Tax Warning About Independent Contractors
As a final word of caution, labor and employment law protections do not apply to independent contractors (e.g., minimum wage, overtime, meal periods and rest breaks, hiring and firing protection, unemployment, etc.), meaning they don’t have to adhere to ANY of those things if you’re an independent contractor.