Should your worker be classified as a W2 employee or a 1099 contractor?
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EmailMisclassification can lead to penalties, back taxes and fines.
Farmers hire people to do many tasks, including running equipment, milking cows, and harvesting crops. Each hired individual must be classified as a W-2 employee or a 1099 contractor. This classification is important due to legal, tax, and financial responsibilities. In particular, the Internal Revenue Service requires the employer of W-2 employees to withhold income taxes and pay half of Social Security and Medicare taxes. In Michigan, employers are usually also required to pay unemployment taxes on W-2 employees. On the other hand, when a worker is classified as a 1099 contractor, employers do not typically withhold income taxes or pay payroll taxes.
Farmers may prefer to classify workers as 1099 contractors because it can save money and reduce paperwork, but the Internal Revenue Service has strict rules that must be followed. Workers must be classified based on how much control the farmer has over the work and how much independence the worker has. If a worker is misclassified, the employer may face penalties, back taxes, and fines.
The IRS guidelines look at three main areas to decide whether someone is a W-2 employee or a 1099 contractor:
1. Control over the work
W-2 employees are usually told how, when, and where to do their jobs. These employees may receive training and step-by-step instructions. In contrast, 1099 contractors have more freedom. Contractors decide how to complete their tasks and generally set their own schedules. The business for the most part simply gives the contractor guidance on what the final result should look like, not how the work is done.
2. The financial relationship
W-2 employees are usually paid a regular wage or salary and use tools or equipment provided by the employer. In comparison, 1099 contactors usually pay for their own supplies and tools, and they are often paid by the project or task. They also have the chance to make a profit or take a loss based on how they manage their work.
3. The type of relationship
A W-2 employee is usually someone who works for the business on an ongoing basis. W-2 employees do work that is regular and important to the farm’s operations. A 1099 contractor, on the other hand, is usually hired for short-term work or a specific project. There is no expectation that the work will continue after the job is finished.
Here are examples of each type of worker:
- W-2 Employee: Daniel works full-time on a dairy farm. He works 6 days a week milking and feeding cows. He follows the farm’s standard operating procedures, has a schedule provided by the farm owner, and uses the farm's equipment. Because of this control and the regular hours, Daniel is a W-2 employee. The farm must withhold taxes from his paycheck, pay part of his Social Security and Medicare taxes, and provide him with a W-2 form at the end of the year.
- 1099 Contractor: Jake owns his own tractor and hay baler. The farm hires him twice during the season to bale hay. Jake sets his own schedule, brings his own equipment and works without direct supervision. His responsibility is to provide baled hay in the field. Because Jake is independent and controls how the job gets done, he is a 1099 contractor. The farm does not withhold taxes from his payment but sends him a 1099-NEC form at the end of the year.
The IRS provides additional guidance on their website. If the farmer is not sure how to correctly classify a worker, they can fill out IRS Form SS-8. The IRS will review the form and decide whether the person should be treated as a W-2 employee or a 1099 contractor.
