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July 6, 2023
W-2 Employee vs. Subcontractor on 1099: The Risky Difference
There is no such thing as a “covered” 1099 contractor on your company’s workers’ compensation policy. Many employers try to save money by labeling otherwise statutory employees as 1099 workers, which can be disastrous for your bottom line as well as put you in risky legal waters.
You cannot label employees as 1099s if you have any sort of meaningful direction and control over their worksite duties and workday schedule. Below we’ll discuss the differences between a subcontractor vs. an employee and how you can avoid the legal and regulatory pitfalls of mislabeling.
As a disclaimer, we cannot provide legal advice. This article is informational only; if you have specific legal questions, you should speak with your company’s attorney.
What Is an Independent Contractor?
Independent contractors, or 1099 workers, get a 1099 form from you at the end of the year. They generally pay their own self-employment taxes and are not covered under your workers’ compensation insurance. Some common types of 1099 workers are “gig” employees such as freelance designers, writers, web developers, and the like, as well as consultants, guest speakers, and subcontractors in a construction business.
What defines an independent contractor in most states is the level of control they have over how and when they do their work. They are not bound by a set schedule (though they may have deadlines), and you do not oversee or manage the work they do. You simply assign them a task to perform. In short, you direct the product they produce, but you have little say in how it is produced.
What Is an Employee?
Employees receive a W2 at the end of the year. The Employer withholds federal, state, and local taxes from each paycheck, and for the most part (with very specific exceptions), they are likely covered under the Employer’s workers’ compensation policies. They may work full-time or part-time, and they can be paid hourly or salaried.
What defines an employee is that their employer can control how they do their work. You schedule specific times when they are on the clock (which may or may not be flexible). You assign duties and oversee how those duties are performed, however relaxed or strict your policies may be. If you direct both the product, they must produce as well as how they produce the product, they are likely your employee.
1099 vs. W2 Workers by State
The core difference between W2 and 1099 workers — or employees vs. subcontractors — is the degree of control the employer has over how they perform their work. It is important to note, however, that the specific qualifications can vary by state, sometimes widely. Each state sets its own terms for what constitutes “control” over how the subcontractor vs. employee produces their work.
What if a Worker Is Misclassified?
The consequences of misclassifying a worker can be severe. You may find yourself under an audit and review by your state’s workers’ compensation and unemployment agency, your state labor department, the IRS, the U.S. Department of Labor, and even the National Labor Relations Board. Each of these agencies is independent, so that could amount to a lot of audits.
The IRS can charge you penalties and back taxes that can put your company out of business over a misclassified worker. Some states consider misclassification a fraud, which can carry not only financial penalties but also jail time. In the end, misclassifying a worker can be far more costly than the money you save by incorrectly listing an employee as a 1099 worker.
SPLI Is Ready to Help You Stay Compliant
SPLI offers PEO services and expert management of workers’ compensation packages for companies of every size. We have extensive experience in many industries that use both 1099 workers vs. W2 employees. That experience can help ensure that every employee and subcontractor is properly paid, classified, and covered. If you are interested in learning about the PEO workers’ compensation policies, we have and in protecting your subcontractor vs. employee classifications, we are ready to help. Download our ebook today!
