If you’re bringing on a new hire, you’ll need to classify them as either an employee or an independent contractor.
An independent contractor is typically someone who can work from any location during a time of their choosing. They can work for multiple companies, using their own tools and resources, and are often paid on a project or flat-fee basis. An employee is someone who works specific hours at a location chosen by the employer. They generally work only for one company, use the employer’s tools and resources, and are paid a salary or an hourly wage.
While the above explanation might sound simple, it’s a bit more complicated than you might think. We’ll walk you through steps you can take to convert from 1099 to W2
Over the course of an employee’s relationship with an employer, a reclassification of tax status may be required. Often, a business will hire workers on a contract basis. If the relationship becomes regular and ongoing, the business may need to convert the worker from an independent contractor to a salaried worker. Failure to properly classify a worker as an employee and to pay required payroll taxes could subject the company to penalties. When a conversion does occur, both the employer and employee have certain responsibilities.So here are steps to convert from 1099 to W2:
Review the Internal Revenue Service guidelines regarding when a worker should be treated as an employee rather than an independent contractor. Identify all contractors who worked for you that will receive a 1099 at the end of the tax year and need to be converted to a W-2 under the same guidelines.
Notify the contractor in writing of the immediate need to convert him to an employee and what identification information you need to effect this change. Document the date and time these records were produced in the employee’s file. Use a certified mail receipt with sufficient postage if you send the notice via surface mail. Keep the receipt stamped by the U.S. Postal Service in your records as your legal “proof of mailing.”
Set up a new employee file in your employee database and record system. Classify the contractor who is being converted as either salary, salary exempt or hourly non-exempt, based on the work involved and the level of responsibility the employee will have. Use your computer and Internet access to review the U.S. Dept. of Labor guidelines based on the Fair Labor Standards Act.
Set up a pay schedule commensurate with the type of regular employee classification the contractor will become. Establish triggers for payment of overtime after 40 hours of work a week if the new employee is to be an hourly employee.
Require the new employee to complete a W-4 form providing individual information and tax exemptions to be calculated when determining payroll withholding taxes. Input the new employee into your employee database and timekeeping system as needed.
Generate a completed W-2 form for the new employee before Jan. 31 for the preceding tax year reporting wages, taxes withheld and other information required on the form. Send four copies to the employee for various tax filing requirements. Keep one copy for your own business records and send one copy to the Internal Revenue Service and state or municipal tax authorities, if applicable.
To learn more on how to calculate these amounts, please feel free to reach-out to us here at SW HR Consultingat 702-979-2119 as we would be glad to partner with you through these important steps.