In today’s world, we are faced with two very different types of employees. We have W-2 employees (the regular hourly based employee) and we have the elusive and misunderstood Independent Contractor or also known as a 1099 Employee.
An Independent Contractor differs from the normal employee in several aspects. The first difference would be how the job plan is set up. In instances when you would use an independent contractor you have a task for them to complete and you will pay them a certain amount of money after this specific task is done. For example, if you would like to remodel your kitchen floors and replace your tile for hard-wood, you would most likely call an independent flooring contractor. They would come in and install the flooring for a certain amount of money based of square footage of flooring space. Then, after the work is complete you pay the contractor for the job. While an hourly based employee would understand what specific times they start and end; they are supervised by the employer on a day to day basis. They are much more structured in their daily responsibilities of the company instead of the self-instructed contractor.
This leads into the next reason why they differ from regular employees; how they are paid. In these instances, independent contractors are their own bosses. They decide what jobs to take, what hours they will work, where they will drive for jobs etc. Independent Contractors are responsible for taking care of the other half of social security and Medicare taxes that a “W-2” employee doesn’t have to worry about. In a situation with a regular hourly employee, social security and Medicare taxes are already taken out of your paycheck. For the independent contractor instance, they are responsible for all taxes, even the other 7.65% that an employer would usually take care of.
Now in a perfect world, everyone would understand the difference, but unfortunately that isn’t the case. In recent times, employers are abusing the 1099 system by hiring employees and treating them exactly as you would treat a regular employee by giving them set hours, certain things they have to do every day, and not allowing the contractual freedom that being an independent contractor is supposed to give. They are doing this because they don’t have to pay the extra 7.65% (plus the employer responsible Unemployment taxes ranging from .3%-6%) and they are getting away with it because employees don’t understand the difference between a W-2 and 1099 until it comes to pay taxes and they are paying double to what they are supposed to. This misguidance leads to disgruntled employees, which then in turn leads to law suits, IRS, and Department of Labor Wage and hour investigations.
This is one of the very important reasons why you would want to work with an Employee Leasing Company over a payroll company. Payroll is a function of HR and so instead of just doing the number crunching, we take into account the well-being of our clients and handle human resource issues with our experience and knowledge of how payroll functions throughout the different pieces of a company.