1099 vs W2 | Ecommerce Examples

All right, before I get started I would ask you to watch my 1099 versus W-2 employee video, as it goes over a lot of the key topics that I'm going to be discussing here. Specifically, it's going to talk about three key IRS rules, the behavioral, financial control, and type of relationship rules that dictate whether somebody is a 1099 independent contractor or a W-2 employee.

Let's talk about a really easy scenario. If you're working with somebody who is employed by another business, they are a 1099. No problem. We're going to be talking specifically around an individual who is a 1099 and an independent contractor.

1:14 A marketing specialist

Let's talk about three roles a business doing ecommerce might employ.

So let's talk about a marketing specialist and start with the behavioral rules. Are you dictating how they do the work, or just the requirements? Are you telling them when and where to work, or just setting deadlines? Are you training them? They are a W-2 employee. If not, 1099.

So let's talk about financial control. Who is determining how they get paid? Who is paying for their tools? Here, good example, Adobe Creative Cloud. Are you providing Adobe Creative Cloud, or are they bringing it to do the job, or are they bringing a different tool altogether to get the job done? And finally, a real easy clarification, do they work with other customers? If they're working with other customers, it's a lot easier to say they are a 1099. If they're only working with you, it's a little bit more difficult, but not impossible, to say they are a 1099 independent contractor.

Finally, the third rule, type of relationship. Is there a contract with terms? Are any benefits provided? If there's a contract with terms, more likely a 1099. If you're giving them any benefits, more likely a W-2.

So, likely scenario, marketing specialist, 1099 or W-2? Again, it depends, but most often I would say 1099.

2:24 A warehouse worker

Let's talk about another common employee in a business doing ecommerce, a warehouse worker.

First off, let's talk about the behavioral. Are you dictating how they do the work? Most of the time yes, therefore W-2. Are you telling them when and where to work, or just setting deadlines? Again, it's a warehouse worker, probably going to have to set the terms, probably have to tell them when and where. W-2. Are you training them? Most likely yes. W-2. This is a much more difficult situation to be a 1099.

Let's keep going. Financial control. Who is determining how they get paid? Are you setting the pay periods? Are you paying them off of your payroll, or are they invoicing you and you are paying them in a method that they approve? Who is paying for their tools, the forklift, the gloves, et cetera? Most likely you are. Again, this role is much more difficult to be anything but a W-2.

Finally, the type of relationship. Is there a contract with terms? Are you providing any sort of benefits? If the answer is contract with terms, 1099. But if there's no contract, if you've hired them, if you're providing any sort of additional benefits, W-2.

Final verdict on this employee. It's very difficult for a warehouse worker, including a seasonal warehouse worker, to be anything but a W-2 employee. So I'm going to say W-2 employee.

3:51 An IT specialist

Third example, an IT specialist. Ecommerce companies have a lot of technology, they have a lot of systems, they might hire somebody to help them administer those systems.

Let's go through those three rules one more time. Behavioral. Are you dictating how they do the work, or just the requirements? Are you telling them when and where to work, or just setting the deadlines? Are you training them? Again, this is something that there can be a lot of independence. They probably have their own tools, their own computer. You don't necessarily have to do the things to make them a W-2 employee.

Second rule set, financial control. Contract. Are they determining how and when they get paid, or are you determining that? Who is paying for the tools, who's paying for their computer? That's an obvious one. If they're bringing their own computer, more likely a 1099. Do they work with other customers? Again, if the answer is yes, easier to say they're a 1099.

Final rule, type of relationship. Is there a contract with terms? Are benefits provided? Again, if you're not providing benefits, if they are coming in with a contract, they're a 1099. My verdict on this type of employee is they could very easily be a 1099.

4:57 The gray areas

Now as you can see, as we go through these different examples, there's a lot of gray areas, and this is where a lot of businesses get into trouble. They will lean and bend the rules and say, well, I'm not doing this, I'm not doing that, therefore 1099. But if it leans W-2, make them a W-2 employee.

All right, if you found this video to be helpful, I'd love to hear from you. Like it, ask me a question. If there's a type of employee in your business and you'd like my qualified but non-legal opinion, I'm happy to give it. Ask a question in the comments. And finally, subscribe to our channel. And if you need help with your accounting needs, reach out to us at ledgergurus.com.