W-2 Employees vs 1099 Contractors: What Missouri Small Businesses Need to Know
One of the most common — and costly — mistakes small business owners make is misclassifying workers. Many businesses believe they’re hiring independent contractors, only to find out later that the IRS considers those workers employees.
If you operate a business in Neosho, Joplin, or anywhere in Southwest Missouri, understanding the difference between W-2 employees and 1099 contractors is critical to protecting your business from audits, penalties, and back taxes.
What Is a W-2 Employee?
A W-2 employee is someone who works under your control. In general, if you:
Set their schedule
Train them how to do their job
Require them to follow your procedures
Provide uniforms or equipment
Have the authority to hire or fire them
Then the IRS likely considers that worker an employee.
With W-2 employees, employers are required to:
Withhold federal and state income taxes
Pay Social Security and Medicare taxes
File payroll tax returns
Issue a W-2 by January 31
What Is a 1099 Independent Contractor?
A 1099 contractor operates independently. Contractors typically:
Work for multiple clients
Control how and when the work is done
Provide their own tools or equipment
Are hired for a specific project or time period
When paying a contractor, you do not withhold taxes. Instead, you issue a 1099-NEC by January 31 for total payments made during the year.
Why Worker Classification Matters
Misclassification isn’t just a paperwork issue — it can trigger serious financial consequences.
If the IRS audits your business and determines that your contractors should have been classified as employees, you may be responsible for:
Back payroll taxes
Interest
Penalties for each worker
Penalties for late or missing 1099 filings
Late 1099 filings can result in penalties starting at$60 per form, increasing the longer the delay continues. If the IRS believes the misclassification was intentional, penalties can be significantly higher.
What Happens During an IRS Audit?
During an audit, an IRS agent may review your tax return and payroll records. If they notice:
No wages reported
No payroll tax filings
Workers operating as employees
They can reclassify those workers retroactively. That means payroll taxes, interest, and penalties dating back to the employee’s start date.
What Should You Do If You’re Unsure?
If you’re currently paying workers as contractors but they function like employees, it’s often in your best interest to reclassify sooner rather than later. Addressing the issue proactively can reduce risk and limit penalties.
Working with an experienced local accountant can help you:
Properly classify workers
Correct past filings
Set up compliant payroll systems
Avoid IRS problems before they start
Get Help from a Local Missouri Tax Accountant
At Lemman Tax Accountant PLLC, we help small businesses in Neosho, Joplin, Webb City, Seneca, and surrounding Missouri communities (as well as nationwide) stay compliant with IRS rules while focusing on growth.
If you have questions about payroll, worker classification, or 1099 and W-2 filing requirements, professional guidance now can save you thousands later. Let's schedule a meeting today!
