W2 vs 1099 employee featured image

It’s a common conundrum: should you hire your freelance crew members as 1099 employees or under a W2? Hiring and managing crew in the entertainment industry is challenging. Regulations are numerous – from unions’ collective bargaining agreements to specific labor laws that can vary by state. In this article, we will look at one of the most important factors to consider: worker classification, and what the difference is between a W2 vs 1099 employee.

Before we take a deep dive, let’s recap the basics:

  • An independent contractor typically fills out a W-9 form, invoices for their work, and receives a 1099-MISC from their employer.
  • An employee typically fills out a W-4, an I-9, submits a time card for their work, and receives a W-2 from their employer.

If you are an experienced filmmaker, paying your crew via a payroll company is a no brainer. For less experienced production professionals, hiring independent contractors may seem fine, if not a budgeting necessity. However, what may seem like a good idea for everyone (freelancers included) is far riskier than most would think.

Based on the IRS’ guidelines, 99% of crew members should be classified as employees. To better understand when and what determines the classification of an employee vs a freelancer you can use the ABC test. We will not be covering the ABC test guidelines in this article, or how it applies to our industry, but we will be explaining what the different classifications indicate, and what risks your production faces if it misclassifies a crew member.

Employee – Employer Relationship Summary

  • Employers control the following aspects of an employee’s performance:
  • Employees have the following rights, obligations, and options:
    • fill out an I-9 and a W-4 form at the time of hiring
    • paid through payroll and often eligible for benefits
    • wages are protected by state laws and/or collective bargaining agreements
    • can file for unemployment benefits
    • accrue sick days over time
    • covered by “Worker’s compensation insurance” (this insurance is paid for by the employer)
    • receive a “net” payment. The following taxes are withheld from their “gross”:
      • Social Security tax
      • Medicare tax
      • Federal income tax
      • State income tax
      • Applicable local taxes
      • Potential wage garnishments
    • must be paid within a specific timeframe (usually 7 to 15 days, depending on the state or union they belong to)
    • receive a W-2 form from their employer for tax purposes
    • contribute on top of the employee’s salary by paying the following taxes:
      • Social Security Tax
      • Medicare Tax
      • Federal unemployment taxes (FUTA)
      • State unemployment taxes (SUTA, also known as FUI)
      • Applicable local taxes

Contractor – Employer Relationship Summary

  • In most states (California included), contractors are defined as:
    • Free from control and direction of their employer
    • Performing work outside the usual course of the employer’s business
    • Engaged in an established trade of the same nature as the work performed
  • Contractors fill out a W-9 form at the time of hiring
  • Contractors are paid after submitting an invoice for their work. The payment schedule depends on the terms outlined in the contractor’s deal memo.
  • Contractors can be paid any amount for any work. There are no regulations per se.
  • Contractors receive a “gross” payment. They only pay taxes on their income when filing quarterly or yearly taxes.
  • If the contractor’s services total more than $600 per year, their employers must send them a 1099-MISC for tax purposes.

Comparison Table

W2

1099

Individual protection
  • Must be paid an hourly rate or according to union rules
  • Protected by state labor laws or union rules
  • Payment schedule
7-15 days 1-90 days
  • Accrued sick days
  • Eligible for benefits (medical, dental…)
  • Eligible for unemployment benefits
  • Protected by worker’s compensation insurance
Employer protection
  • Protected by worker’s compensation insurance
Taxes
  • Employer must contribute to federal and state programs
  • Individual’s wages are taxed at the time of payment


Employers prefer hiring contractors since it saves them from having to contribute to state and federal programs.

Why everyone prefers contractors:

  • Since state labor laws don’t apply to contractors, employers can avoid paying contractors overtime by paying them by the “day” or “week”.
  • Contractors get the benefit of getting paid the gross amount. This allows them to offset their tax obligations in many ways.

However, contractors don’t benefit from any sort of protection:

  • Contractors aren’t eligible for benefits or sick days
  • Contractors aren’t eligible for unemployment benefits. However, many of them apply for it regardless (more on this below).
  • Contractors tend to receive their payment much later than employees

The importance of worker’s compensation:

  • When an employee is injured, the worker’s compensation insurance covers the employee’s medical costs.
  • At the same time, generally speaking, worker’s compensation insurance prevents employees from suing their employer for a workplace injury.

Benefits Of Hiring Crew Members As Employees

First and foremost, the government wants you to classify crew members as employees. It wants to ensure that people are paid a viable minimum wage and aren’t treated poorly. There are some situations that allow you to hire independent contractors, but they are very few and far between.

Reason 1: We’ve already mentioned how worker’s compensation covers both employees and employers. Workers’ comp rates are higher for people who work on set (versus in the office) for a reason. While you don’t want anyone getting injured in the first place, you especially don’t want them to sue you for a workplace injury.

Reason 2: Independent contractors will often file for unemployment. As we’ve established earlier, they aren’t technically eligible for these benefits, but this action will still raise a flag with the IRS. You can potentially expect the IRS to audit your business in return, and, if found to be misclassifying workers, you will be subject to heavy fines. These fines potentially include:

  • $50 for each W-2 that you failed to file due to the misclassification
  • 1.5% penalty on income wages tax
  • 40% penalty on FICA taxes that were not withheld from the employee
  • 100% matching of the FICA taxes you should have paid as the employer
  • 0.5% penalty added per month (up to 25%) until the tax liability has been paid.

Ouch! And if you think that you can avoid this by closing down the LLC that was opened for a specific production, think again. The government will get its money, regardless of your tax classification as an employer.

The IRS has been actively chasing after employers in the film industry, and with the recent implementation of the AB-5 bill, it’s now clear that this is a problem they take seriously.

Note: It is unlikely, but an employee can submit a claim with the IRS if they believe they have been misclassified as an independent contractor. In that case, you can definitely expect the IRS to open an audit into your production.

How To Hire Freelancers As Employees, The Easy Way

At Castifi, we are aware that in addition to the tax liability employees represented, there are many complications that can make running payroll for a small crew cost-prohibitive.

This is why we have built technology that enables you to focus on producing, while we handle the paperwork and payroll submission process. Within a few minutes, you can add your crew to your Castifi Producer portal, review hours worked on set, and submit all this information to one of our payroll providers.

digital w2 forms

Castifi provides support to both employer and employees via email and phone in order to resolve onboarding and payroll difficulties swiftly.

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