A 1099 employee is a popular term for independent contractors, derived from the tax form 1099 that their employers are required to fill out. There are two types of hires in every company - employees managed by the employer, with a high level of control and a costly benefits package, and external hires, where employers are perceived as clients, having little authority over the contractors, and paying only for the job, without all the deductions and benefits. This distinction matters most to the IRS, which taxes these two types of hires very differently.
Who is a 1099 employee?
1099 employees are otherwise known as independent contractors, freelancers, self-employed individuals, or sole proprietors. They are business owners and they provide different services to clients. Although they are usually managing a small business, that doesn't have to be the case. Contractors often work with various clients, and they only get paid for the work they perform, without any benefits or tax deductions.
1099 employees have a lot of autonomy over their ways of working, and their clients have a very low degree of control. They don't enjoy any of the regular perks, such as office space, paid vacation time, any type of workers compensation... They take care of all of their business expenses, and they aren't protected by the Department of Labor, against issues such as discrimination, minimum wage, and others.
What are the most common types of 1099 employees (independent contractors)?
Since there is no text-book definition, nor a profession or a role that is always done by a 1099 employee, every situation is different. However, there are a couple of jobs that are done by 1099 employees more often than others. Small business owners usually get hired to do project-based work, with limited resources (budget, time, and personnel). Social media strategists, content writers, web designers, and CPAs are amongst the professions that are hired externally. In addition to these roles, that only recently came into the spotlight, your 1099 employee can also be your painter, caterer, photographer, and cleaning service.
It all depends on the type of business you are running - freelancers are hired to do back office, not the core functions. That means that if you own a restaurant, the types of workers that you need to employ full-time are waiters and cooks. However, if you want to change your interior design, or update the menus, your best option would be a 1099 employee.
Is a 1099 employee considered self-employed?
In most cases, yes, although the definition can be a little tricky, and here is why. According to IRS, an independent contractor is most definitely self-employed, distinguished from the employee by the fact that they control the work process, and the payer controls only the outcome. They list examples such as doctors, lawyers, web designers...
However, not all self-employed workers are independent contractors! Some of them can also be merchants, providing goods instead of service.
Is a 1099 employee covered by workers comp?
Unfortunately, they aren't. W2 Employees are protected under several Department of Labor laws, protecting them and providing them with benefits. Since 1099 employees aren't employed in the traditional sense, but they choose to be the owners of their business they receive no such perks, one of them being the workers' comp.
Ensure compliance with our localized contracts
Generate contracts in seconds. We’ll ensure that you're complaint with local labor laws, no matter where you live.Learn more
What is the difference between a 1099 employee and a subcontractor?
Most companies hire independent contractors for every service they need but aren't able to perform amongst their employees. However, sometimes the work is too big for just one person and there is a need to hire a subcontractor. A subcontractor is a worker who is awarded a portion of an existing contract by a principal or general contractor. Depending on the contract between the company and the principal contractor, the contractor may hire subcontractors to do the work.
In some cases, subcontractors are required to have workers comp insurance. It would be wise to request a certificate of insurance from your subcontractors as well, in order to make sure you won't be responsible for any claims.
What are the benefits of hiring a 1099 employee?
When it comes to full-time employees vs 1099 employees, the biggest benefit is undoubtedly the cost. When hiring an independent contractor (1099 employee), employers aren't required to pay health insurance, payroll taxes, social security tax, unemployment taxes, etc. There is no tax withholding at all. Employee benefits are off the table and the 1099 employee is being paid only for their work. That is significantly cheaper for the payer, which is why hiring these non-employees can be very beneficial for your budget.
However, that isn't the only perk of hiring 1099 employees. They are in charge of their own education and training, and they don't need to follow company trajectory or develop their skills according to a strict system. This usually means that their knowledge is wider than expected and that you can count on their expertise. If they have worked with several clients, across industries and business models, you can expect to get the best possible service.
In addition to this, all the tools needed for work are their responsibility - software, hardware, license, certification, and materials. That is a very big plus, financially and logistically as well.
1099 employees also work very autonomously, so you wouldn't have to invest time in managing them, developing them, and making sure they are happy with their role. Your only responsibility is to provide your 1099 employees with all the information they need and to set up expectations. It is best to do so in a written contract, so each party knows what to expect.
What is the benefit of being a 1099 employee?
When regular employees make a switch to freelancers, choosing to start their own company and tackle all the risks that come with it, their motivation is almost always the same - autonomy. The ability to choose who you work with and under which conditions is the biggest benefit of being a 1099 employee.
In addition to this, you can set up your own hours, take vacations whenever you please, and have complete control over your work and private life. When you get your business off the ground you can also enjoy the financial perks of being a business owner.
Which factors determine the 1099 employee status?
For the sake of tax purposes, it is very important to determine the status of every person you hire, employee or not. The legal responsibility lies with the employee, with the one in charge of the tax payments. In order to determine whether the person working for you is an employee or a freelancer, consider these factors.
Methods of working
If your hire works independently, without needing input and guidance from you, you are probably dealing with an independent contractor. If knowledge, methodology, tools, ideas, and problem-solving are entirely up to them, then you can consider them independent.
Degree of control
Are you in charge of their schedule? Vacation time, working hours, office space? With a higher degree of control comes a high probability that you need to upgrade their status to a regular employee. independent contractors need to have autonomy, and if they don't, the employer can't consider them independent.
Longevity of the relationship
One of the factors to consider is also the length of the relationship. If you hired someone to create a brand strategy for the next three months and you've given them two weeks to do that, you can consider them a freelancer. However, if you have a dedicated person, working for a prolonged period of time on your social media activity, and you communicate daily with them and they are an essential part of your team... That person should have the status of an employee, for sure.
Learn more about how to convert an independent contractor to an employee.
What is the difference between a 1099 contractor and an employee?
1099 employees and W2 employees got their names based on the tax form IRS requires for them. Taxpayers, in this case, business owners acting as employers, need to file Form 1099-NEC (previously within Box 7 of the 1099-MISC form) for every independent contractor they work with, and they need to file a Form W2 for every employee.
W2 employees are standard employees, working directly for the business, for whom the employer maintains a high degree of control and complies with employment wages, schedules, perks, and benefits). Employers withhold taxes on W2 employee's salaries as well. W2 employees are protected under the law passed by the Department of Labor.
Learn more about the difference between W2 employees and 1099 contractors.
What is misclassification?
In order to avoid the burden of taxes, some employees choose to file their employees as if they were independent contractors. Since the line is blurry, and IRS offers only guidelines, it isn't always easy to determine in which category a certain employee falls under.
However, the burden of proof is on the taxpayer, and in order to avoid any fees and punishments one should always assume that their hire is an employee unless proven otherwise. Misclassification is very common and very pricy, but if you follow our guidelines, you can avoid it.
Bottom line is that in doubt, you should definitely file your hire as if they were an employee. If a mistake has been made, you can always file for a tax return. However, there is another step that you can take. You can file a Form SS-8 with the IRS, in order for them to determine the necessary classification in your particular situation.
Learn more about the misclassification risks and how to avoid them.
What paperwork is needed for a 1099 employee?
Although most 1099 employees work for a limited time, often attaching themselves only for the duration of the project, they still need to sign a written agreement with their client. The contract should state all of the important info about both parties, ways, and methods of payment, expectations, and penalties.
In addition to this, independent contractors are required to provide their clients with info about their business, through the W9 form. Afterward, they are required to turn in the 1099-NEC to the IRS.
What tax forms to collect when hiring 1099 employees?
When it comes to tax filing for 1099 employees, the process is fairly simple. Firstly, you need to request your contractor to provide you with a Form W9. This form contains several important pieces of information from your contractor, one of them being the taxpayer identification number.
You need this number in order to fulfill the Form 1099-NEC. Since 2020, the previously used Box 7 of the 1099-MISC, and a new form, previously withdrawn, has been reinstated - Form 1099-NEC.
Keep in mind that if the independent contractor is based outside of the United States, a From W-8BEN or W-8BEN-E needs to be submitted instead of W-9.
What taxes does a 1099 employee pay?
Another important thing to note is that 1099 employees are responsible for filing their own taxes. Employers aren't paying the FICA tax for them, so they are required to pay a self-employment tax, that covers their contribution to social security and medicare taxes. They also need to pay an income tax.
Read more about independent contractor taxes.
What can a 1099 employee write off?
Another important benefit of working as an independent contractor are tax deductibles. If you decide to run your own business there are plenty of business-related expenses you can write off. IRS recognizes that there are plenty of costs every business owner has, such as home office, advertising, commissions, travel expenses, professional services... Filing these tax deductions can have a significant impact on your overall business success, so make sure to check out our complete list of tax deductions for independent contractors.