When you work with ShiftMed, you're a W-2 employee—not a 1099 independent contractor. But what does that mean, exactly? You'll find these employment classifications are different in several ways, but in this post, we'll focus on payroll taxes.
While employees and contractors must pay income tax to the Internal Revenue Service (IRS), we'll explain the three ways these classifications differ. Before we get started, it helps to understand the different types of payroll taxes you pay to the IRS:
Social Security Taxes A flat percentage that's based on your taxable income.
Medicare Taxes A flat percentage that's based on taxable income.
Federal Income Tax The amount withheld for these taxes is determined by you.
State and Local Income Taxes The amount withheld for these taxes is determined by you and varies by location.
1. Pay Now or Pay Later
As a W-2 employee, you pay your income taxes incrementally by having ShiftMed withhold a specified amount from each of your paychecks. In turn, we take that specified amount—determined by you when you completed your W-4 Form—and submit those funds to the IRS for you.
What's nice about being a W-2 employee is that you don't have to manage your income taxes throughout the year—we do it for you! Then, in late December or early January, we'll send you a W-2 Form, so that you can file your taxes before the April deadline. However, as a 1099 independent contractor, you're responsible for managing and paying your taxes in one lump sum at tax time. Not to mention, it can be tricky and cumbersome to manage your taxes each quarter. If you don't estimate your taxes correctly and don't set enough money aside, you'll most likely be caught off guard by how much money you owe on your tax bill in April.
2. Earn More Now or Earn More Later
When you're a 1099 independent contractor, it feels like you're earning more than a W-2 employee—but it's misleading. It only feels like more money because your payroll taxes aren't being taken out incrementally with each check. You'll have to pay your income taxes all at once at tax time. Not to mention, as a 1099 worker, you pay more in taxes overall. Most 1099 workers don't realize that they must pay the employer's share of FICA taxes (Social Security and Medicare) in addition to their income taxes. In other words, 1099 workers pay twice as much in FICA taxes as W-2 employees. Why? When you're a W-2 employee, the company you work for pays half of your Social Security and Medicare taxes. As a ShiftMed W-2 employee, we pay 7.65% of your FICA taxes while you pay the other 7.65%. If you were a 1099 independent contractor, you'd be paying the full 15.3% out of your pocket.
3. More Financial Stability or Less Financial Stability
As a W-2 employee, you have more financial stability than a 1099 independent contractor. Your recognized income helps make you eligible for car loans, rent applications, and mortgage loans. W-2 employees are also better protected under the law regarding minimum wage, overtime protection, and workers' compensation benefits. None of these laws apply to 1099 workers. W-2 employees are also eligible to participate in company benefit programs, such as health, dental, and vision insurance. ShiftMed will soon start offering health benefits to healthcare professionals who meet the set criteria.
True or False
When you work with ShiftMed, you're a W-2 employee. TRUE: You're a W-2 employee who pays taxes to the IRS every paycheck.
ShiftMed determines how much income tax to withhold from your paychecks. FALSE: You determine the amount when you complete your W-4. A W-4 is an IRS form that tells employers what income taxes you want to be withheld from your pay.
When you're a 1099 independent contractor, you pay more taxes to the IRS. TRUE: 1099 workers must pay 100% of their FICA taxes, whereas a ShiftMed W-2 employee only pays 50%.
ShiftMed does not keep any money that's withheld from your paychecks. TRUE: We submit all the payroll taxes you must pay (Social Security, Medicare, Federal Income Tax, and State Income Tax) to the IRS every paycheck.