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What's the Difference Between W-2 vs. 1099 Tax Treatment?
When a person is paid on the form W-2, the employer automatically withholds and
pays all of the necessary employee income taxes as required by the IRS. These taxes
include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare).
In addition, the employer will pay all of the necessary employer taxes. These taxes
include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and
SUI (State Unemployment Tax).
When a person is paid on the form 1099-misc, all money earned by the individual
is paid on an untaxed basis. It is then the responsibility of the individual to
file and pay the appropriate taxes. The IRS has found that when an individual is
responsible for paying his/her own taxes, etc., many times it is not as much as
it would be when the employer is paying the correct tax amount. This is primarily
due to workers taking full advantage of any potential business deductions so that
they pay less in taxes. Hence, the IRS is cracking down on misclassifications and
imposing some hefty penalties. In today’s staffing industry, it is imperative
that workers are properly classified and that proper taxes are paid to the correct
government entities.
For more information on the 1099 classification, click
here.
What's the FLSA?
In situations where the Temporary Personnel are "Computer Related Professionals"
as defined by the Fair Labor Standards Act ("FLSA"), we can pay an hourly wage
of not less than $27.63/hour (currently $37.94, adjusted yearly, for California)
without having to pay time and a half for overtime hours (hours worked in excess
of 40 per week or hours worked in excess of eight per day in California). Otherwise,
the only way we can avoid paying and billing for overtime hours worked by Temporary
Personnel is when the Temporary Personnel fit the Department of Labor's definition
of an exempt class (as determined by the FLSA) and we pay them on a salary basis.
By definition, "salary" means a guaranteed rate of pay regardless of the total number
of hours worked. Therefore, this "weekly" option would require us to invoice the
client on a weekly "flat rate" basis for the same amount each week regardless of
how few or many hours the Temporary Personnel work. Note: This holds true even when
the Temporary Personnel are clearly professionals (Civil Engineers or Nurses). If
we pay a professional on an hourly basis, then they are not exempt from the FLSA's
overtime provisions (no matter how much money we pay them). The sole exception to
that rule is "Computer Related Professionals," as described above.
For more detailed information about the Fair Labor Standards Act and Federal and
State wage and hour laws, click here.
NOTICE: Top Echelon Contracting has provided the content of this
page for general informational purposes only. You should not substitute this information
for personal consultation with a qualified professional in the field, nor should
you rely upon this information in taking any action. No attorney-client relationship
will be created through your use of this Web site, nor from any response from or
conversation with Top Echelon Contracting.
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