Form W-2 Wage and Tax Statement closeupWhat is the difference between an independent contractor and a W-2 employee you ask?

How employees are classified will affect how much a business pays in taxes, the amount of withholdings from employee’s paychecks and which tax documents need to be filed. Classifying employees correctly is a critical issue that business owners need to understand.

Incorrect classification can lead to large fines and penalties for failing to file the proper tax returns and paying employment taxes.

If you are wondering if you are paying your employee correctly, you’re not alone.

Many business owners struggle with how to pay those who perform work for them. Mistakes are often made in this area; sometimes honest mistakes, and sometimes by business owners trying to save money. In either case, making a mistake and classifying employees incorrectly as 1099 contractors could cost you a great deal of money. The IRS continues to invest in more agents to enforce the rules and penalties are steep!

If you don’t want to put your business at risk, you should take the time to determine how to best classify your employees using the IRS Guidelines. Here is an abbreviated version for your review.

Behavioral Control – Are you directing the employee on how, when or where to do their work? Are they using tools provided by you? Are they working with other employee hired by you? Are they using your supplies or being told by you where to obtain supplies? If the answer to these questions is yes, they are probably a W-2 employee.

Financial Control – Does your business pay the expenses of the work performed? Are you reimbursing the employee for any of their own funds used? Do you take all financial risk away from the employee performing the work? If the answer to these questions is yes, they are probably a W-2 employee.

Relationship of the Parties – Are you providing any benefits to this employee such as health insurance or paid time off? Is this employee lacking their own workers compensation and liability insurance? If the answer to these questions is yes, they are probably a W-2 employee.

If you are still having trouble making a clear decision on how to classify your employees there is another step you can take. Ask the IRS themselves. File form SS-8 with the IRS and they will send back a Determination of Worker Status, and take the guessing out of it.

For more information on how to properly classify your employees, please reach out to Genesis HR Solutions at or 800-367-8367.

Genesis HR Solutions is the premier PEO provider for Massachusetts based businesses.