W-2 Employee or Independent Contractor? What to Know About Employee Classification

What’s the difference between employees and independent contractors?

As employee laws differ between states and frequently change, it is critical that employers correctly determine whether the members of their workforce are employees or independent contractors. Knowing the specific requirements for each designation is important if you want to avoid IRS penalties or any tax concerns and other costs stemming from violating employment laws. 

Misclassification occurs if any employer treats workers as “independent contractors” when they are employees.​ Misclassifying a worker can be costly, resulting in back wages owed and other financial penalties imposed. To help you understand the difference, PeopleReady has created a comparison guide to show the major distinctions between employees and independent contractors.

W-2 employees

Form: Employees receive a W-2 form.

Taxes: Payroll taxes (including Social Security and Medicare) are automatically deducted from a worker’s paycheck and are then sent to the government by the employer.

Pay: W-2 employees receive a regular wage and employee benefits and are guaranteed minimum wage.

Type of work: A W-2 employee works for a company according to the business’s needs and schedule.  

Management: The employer has a significant degree of control over the employee’s work.

Termination: In most cases, a company can let an employee go for poor performance or any other valid, non-discriminatory reason.

Tools and supplies: Necessary materials and tools are often provided by the company for W-2 employees to perform their work.

Benefits: Benefits like health insurance, retirement contributions, and flexible spending accounts are available to all qualifying employees.

1099 independent contractors

Form: Independent contractors are self-employed and receive a 1099 form.

Taxes: Independent contractors are responsible for calculating and withholding their payroll taxes, then paying the government directly.

Pay: Independent contractors earn their compensation according to the terms of their contract and receive a 1099 form to report income on their tax return. Independent contractors also assume the risk for  profit and loss when they carry out their jobs.

Type of work: Independent contractors generally provide specific services as defined by a written contract. Some independent contractors only work on one project at a time, but many serve multiple clients.

Management: Independent contractors determine their schedules and working hours. They also define how and where they work as well as which tools and methods they use to complete their work.

Termination: Businesses engage independent contractors for a defined period, per the conditions outlined in their contract with the independent contractor. That engagement may be renewed so long as both parties agree.

Tools and supplies: Independent contractors are often responsible for supplying their own tools and materials to complete their work.

Benefits: Independent contractors typically do not receive benefits from the businesses they perform work for. For example, these benefits may include paid time off, sick leave and health and retirement benefits.

For further information on worker classification, visit the IRS website.  Additional information is also available from the U.S. Department of Labor.

PeopleReady and PeopleReady Skilled Trades offer W-2 staffing solutions for your business

With support from PeopleReady and PeopleReady Skilled Trades, you can worry less about your recruiting efforts and focus more on serving your customers and growing your overall business.

PeopleReady and PeopleReady Skilled Trades deliver a safe, reliable and compliant W-2 workforce for your staffing needs while also performing a variety of duties for you.

• Our teams are responsible for administrative tasks related to payroll taxes, employee benefits and workers’ compensation insurance.
• Through our comprehensive vetting process, we ensure that every worker we recommend to your company has the necessary skills, experience and commitment to excel in the job.
• We stay on top of changes in labor laws and regulations to ensure that all employment practices remain compliant.
• In the end, our staffing solutions free up your time, allowing you to focus on vital business tasks.

PeopleReady has a local presence in 600-plus markets throughout North America to provide staffing support across a variety of industries, including retail, hospitality, events, manufacturing and more.

Meanwhile, PeopleReady Skilled Trades is home to a dedicated team of skilled trades staffing experts. We work across trades and industries to help you find the tradespeople you need.