When it comes to employees, choosing whether to make them W-2 employees or to pay them on a 1099 basis is part of the hiring process. Typically, anyone doing work for you on a daily basis for the foreseeable future would be an employee and taxes would be filed by them with a W-2. 1099 workers are usually independent contractors who work on a contractual basis. These contractors are hired to complete a specific job that has an end date. Either way, the worker is responsible for reporting and paying taxes to the IRS. However, a 1099 worker is completely responsible for knowing how much to withhold so they can pay the appropriate amount at tax time.
So, what does it mean to you as a business owner? The IRS doesn’t overlook what you call an employee and what you call an independent contractor. A 1099 worker might get released from their contract and try to apply for unemployment benefits. This could open up an investigation. Many companies are guilty of employee misclassification and many, large and small, have had to pay penalties. IRS.gov has guidelines to help you determine which one would be the correct choice for your operation.