W-2 forms and 1099 forms are meant for different workers. You cannot issue the same employee a W-2 and a 1099 at the same time. It’s confusing differentiating the two in your own business, understanding the differences is key to making sure your business avoids triggering an EDD audit.
It’s important to correctly classify your employees to ensure everyone stays in their scope of work. Learn more about the differences below.
There are three pivotal elements to categorizing an employee as having W2 or 1099 status.
- Behavioral Control: Are you in charge of the manner in which workers perform their duty?
- Financial Control: Do you pay regular wages and have the ability to fire the employee?
- Relationship to business: Is the employee an essential part of helping your business run?
What is a W-2?
A W-2 form is an employment tax document that you issue to your employees upon hiring. This form is given to individuals who work a more structured office job.
They usually work nine to five, Monday through Friday. Form W-2 employees complete tasks that you, the employer, give them in their scope of practice. They also are salaried employees. They are on your payroll, usually will receive benefits, and you are responsible for withholding their taxes.
W-2 workers are also protected by the law. They have a minimum wage, meal breaks, safety, and rest break laws. If their rights are violated, they are able to go to the Labor Commissioner’s Office to rectify the situation.
What is a 1099?
A 1099 form is tailored to independent contractors. These are people who have more flexible schedules and are not on your payroll.
They complete a job you hired them to do based on a contractual agreement. This means they are paid a set price for a service that does not fall into your normal business scope. Furthermore, 1099 employees are subject to pay their own taxes and are not eligible for your company’s benefits.
1099 independent contractors are unable to utilize the same laws in place that protect typical employees in the workforce. They do not have laws for minimum wage, meal breaks, safety, or rest breaks. If they feel their rights are violated, they have to use other resources than the Labor Commissioner’s Office to resolve the issues.
What Happens if You Incorrectly Classify an Individual?
EDD performs audits on businesses that trigger red flags for misclassification. If you misclassify an employee, fines and penalties can occur.
Reasons EDD may audit your business:
- Random verification check
- An employee filed a complaint on your business
- A 1099 employee files for unemployment – they are ineligible because of their self-employed status
- You file or pay your taxes late
If you or your business are caught with misclassified employees, EDD will not hesitate to fine and/or penalize you based on the weight of your misclassifications. Knowingly misclassifying an employee as an independent contractor can result in a $5,000 – $25,000 fine per misclassification. You can also be subject to state tax penalties and even up to a year in prison. Any identified misclassifications will result in baseline fines along with paying back payroll taxes, usually with interest.
Other Penalties May Include:
- Misclassifying an employee as a W-2 instead of a 1099 typically results in a $50 fine per misclassification.
- Charge of 1.5% of employee wages to make up for income tax withholding
- Payment of 40% of employee payroll taxes
- Matching 100% of payroll taxes plus interest
- 0.5% penalty for the Failure to Pay Taxes penalty for each month of delinquency
Still need help identifying your employee status? EDD provides a questionnaire to help guide you through the process. Avoid the headache of an EDD audit and contacting our team at got1099 today. We are experts in the field and can classify your employees correctly so you can focus on running your business.
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got1099 is a business reporting company providing business analysis reports to companies re: their 1099 independent contractors We do not provide legal advice. Consult with your attorney relating to any legal issues.