Who is an employee?
Recent Regulations and Resources
Who is an Employee?
An "Employee" means any person permitted to work by an employer. There are two kinds of employees
1. W-2 Workers
2. Independent Contractors
A W2 worker is not their own business owners. They work for a company, participate in employee benefit programs, and work according to the business’s needs and schedule. Unless there’s a compelling, clear reason to classify a worker as an independent contractor, the default classification is employee. By law, employees are guaranteed at least minimum wage (set by both federal and state laws) for the time they’ve worked on a regular and ongoing basis. Companies withhold their W2 workers’ Social Security and Medicare taxes, and pay employer payroll taxes. In most cases, a company can let an employee go for poor performance or any other valid, non-discriminatory reason.
A 1099 worker—or independent contractor—generally provides specific services, as defined by a written contract. Some 1099 workers only work on one project at a time, but many serve multiple clients, providing a service within their expertise. Independent contractors, such as freelancers and consultants, are self-employed, so they’re business owners themselves. 1099 Worker’s sign a contract for a definite amount of time, however this time can be expanded by renewing the contract at the agreement of the contractor and employer.
It is important to recognize that these two types of workers have different uses, and said workers have different expectations from whoever they are working. If you try to treat a 1099 worker as a W-2 worker then there could be legal consequences.
The IRS considers three major categories in determining whether workers are employees or independent contractors:
- Behavioral – Can your business control what, where, how, and when the worker carries out their job?
- Financial – Who controls the economic aspects of the worker’s job? What’s the method of payment (e.g. a regular salary or a flat fee)?
- Type of relationship – Do you provide this worker with employee benefits? What are the length and terms of this relationship, as outlined in a contract, employment agreement, and other documentation?
Federal “Statutory” Employees
The Federal designation of “state employee” has no meaning for New Jersey income tax purposes. If, under New Jersey law, an employer/employee relationship exists between the payer and the recipient of compensation subject to New Jersey gross income tax, the recipient is considered an employee and the payer must withhold New Jersey gross income tax.