There are very clear differences in the official working relationship and financial responsibilities between employers, employees, and 1099 independent contractors.
W2 vs. 1099 refers to the difference in official IRS tax forms. Employees receive W-2 forms from their employer and independent contractors are required to fill out the 1099 form. According to taxing authorities, whether or not the working relationship is consistent with how each type of worker is classified dictates compliance. W-2 employees have payroll taxes deducted by their employer, who pays the government on the employee’s behalf. 1099 Independent Contractors are responsible for their own payroll taxes and expected to submit their own payments to the government.
Sometimes companies (employers) utilize or retain 1099 Independent Contractors, but don’t realize or officially comply with the IRS guidelines of the worker classification. In the recent case of Uber and the state of New Jersey, Uber, the enormous ride sharing company, agreed to pay the state of New Jersey $100 million in back taxes after the state said the company had misclassified its huge number of drivers as 1099 independent contractors.
An audit by New Jersey’s Department of Labor and Workforce Development found that Uber owed four years of back taxes because they had classified drivers in the state as 1099s rather than W-2 legal employees. In summary, Uber was directly managing these workers (sometimes exclusively) and consequently required to pay these drivers as W-2 employees. That reclassification would provide mandatory employee and employer payroll taxes to the state of New Jersey.
UNIFORCE Staffing Solutions offers 1099 Independent Contractor worker compliance through its third party payroll solutions. Companies that are concerned with failing the 1099 Independent Contractor test can rely on UNIFORCE to legally classify those workers as W-2 employees in multiple states.
Additionally, for more information on the Uber case with the state of New Jersey, read the full story from the New York Times.