Paying People in Your Business? Here’s the Difference Between Contractors and Employees
As your business grows, you’ll eventually need help. But before you start cutting checks, it’s critical to know how to properly pay the people who work for you—and the difference between an independent contractor and a W-2 employee.
Misclassifying workers can result in major penalties from the IRS, so let’s break it down:
Independent Contractor (1099)
Independent contractors are self-employed individuals or businesses you hire for specific services. They:
– Control how and when they work
– Provide their own tools and equipment
– Invoice you for services
– Receive a 1099-NEC at the end of the year if paid $600 or more
You don’t withhold taxes or pay employer-side payroll taxes for contractors. However, it’s your responsibility to issue timely 1099s and maintain clear records.
W-2 Employee
W-2 employees work under your direction and are on your company payroll. You must:
– Withhold federal, state, and local taxes
– Pay employer-side payroll taxes (Social Security, Medicare, unemployment)
– Provide a W-2 at year-end
– Follow labor laws related to hours, benefits, and overtime
Which Should You Use?
If you control how, when, and where the work is done—they’re likely an employee. If they have flexibility, offer specialized services, and invoice you—they’re probably a contractor.
Misclassifying an employee as a contractor can result in back taxes, penalties, and interest. That’s why having clean, accurate bookkeeping and a payroll system in place is essential.
At DBR Bookkeeping, we help you:
– Set up payroll for W-2 employees using QuickBooks Online
– Track and issue 1099s for contractors
– Organize your books to keep labor costs clean and compliant
Need help deciding how to pay your team the right way?
Book a free 30-minute call with Dr. Bryan Raya, QuickBooks ProAdvisor:
https://calendly.com/dbr_bookkeeping/30-minute-zoom-consultation-call
Let’s start Doing Business Right!
FAQ: Independent Contractor vs W-2 Employee
Do I need to send a 1099 to all contractors?
Only if they’re paid $600 or more and are not a corporation.
What payroll taxes do I pay for W-2 employees?
You must withhold income taxes and pay employer contributions for Social Security, Medicare, and unemployment.
Can QuickBooks Online handle both 1099s and payroll?
Yes—QBO can track contractor payments and run full-service payroll with integrated tax filings.
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