What is the difference between a traditional W-2 employee and a 1099?

A W-2 employee is a direct employee of a company. When they receive a paycheck, that employee has had deductions for federal and state taxes, Social Security contributions, etc.

On a 1099, the payment earned will be listed, but there are not any deductions taken out of their check for any State or Federal taxes, Social Security or State income taxes be deducted.

A 1099 is not an employee of the said business, but hired on as a free-lance worker. This is filed with the IRS and the obligations of taxes are passed on to the recipient.

With the increasing cost of doing business today, some employers think that they can simply hire a 1099 as opposed to a W-2 and not have to concern themselves with carrying workers compensation coverage. If done appropriately, this is an accurate statement. If not done within the context of a true 1099 relationship this is a violation of the law.

As an employer, if you hire a 1099, you should retain copies of their insurance coverage.  If you do not retain copies and you get audited, you would be responsible to pay premium for the workers compensation coverage for the earnings for that 1099, the same as you would if you had a W-2 employee.

All companies (including a 1099) should have their own General Liability coverage in place. If you hire a 1099 and their work is the reason for a liability claim, who do you think that claim would name?  The company that they hired to perform the work, or a 1099 that was hired by the company that was hired to do the work?

The same is true for the workers compensation coverage. If you hire a 1099 and they were to get injured on the job, they have every right to take legal action against the company that hired them. If you don’t have the workers compensation coverage in place for your business, you are completely exposed for a lawsuit.

If you think that hiring a 1099 is a better decision for your company to grow, make sure that you are doing so within the definition of what a true 1099 is. Remember to always retain certificates of their insurance as well, just in case an accident was to happen.

About Alex McFarland

Alex McFarland is a Commercial Insurance Producer with The Insurance Shop, LLC. Alex specializes in all lines of business insurance and has been with with the Agency since 2005.
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