So what is the difference between an employee and a contractor? Well for one, an employee either works part-time or full-time under the direction/control of an employer. Second, there are affected by payroll liabilities and taxes such as Federal Withholding, Federal Unemployment Insurance, State Unemployment, Medicare, and Social Security tax. A W2 form, which is a summary of one’s earnings for a calendar year, is then distributed to employees by January 31st of the following year.

On the other hand, an independent contractor is someone who is hired for a specific job or service, is not under the direction/control of the employer, and decides how they will perform the job or service. They are not subject to federal withholding or payroll taxes. Finally, a 1099-Misc forms must be distributed to the contract workers who perform services for the company during the calendar year.

Right now you’re probably thinking “I can save tons of money by issuing 1099’s to all my employees!” If an audit uncovers the classifications of employees as independent contractors, you will be held liable for back taxes and even penalized with fines.

For more information regarding this matter please visit the IRS’s Guide concerning employment classification.