A Worker is classified as either an "employee" (reported with form W-2) or an "independent contractor" (reported with form 1099-NEC).
Incorrect classification can result in penalties
It is very important that the Workers are classified correctly in order to collect the proper setup details, calculate tax contributions accurately, and avoid penalties resulting from worker misclassification.
Sometimes referred to as a W-2 worker, an employee is a type of worker who performs services for an employer, where the employer can control what will be done and how it will be done. Payments to employees are subject to tax withholdings and deductions before arriving at the take home pay (also known as net pay). There are two categories of employees:
Exempt
Exempt employees are not entitled to overtime pay and are generally considered executive, administrative, professional and outside sales employees. Example: someone on salary is exempt.
Non-exempt
Non-exempt employees are entitled to certain rights and protections under the Fair Labor Standards Act, including minimum wage and overtime.
Also known as a 1099 worker, an independent contractor is a worker where the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. An independent contractor does not regularly have income taxes withheld from pay, and receives a 1099-NEC form each year to report wages received. The earnings of a person who is working as an independent contractor are subject to self-employment tax.