What Is a 1099 'Employee': Everything You Need to Know
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Many people use the word “employee” to refer to any person who works. In some cases, they’re right, but it’s critical to make a clear distinction between employees and independent contractors.
Employees are workers on a company’s payroll who have a work schedule determined by their employer. The employer also provides mandatory benefits, professional training, and working tools.
Independent contractors, or 1099 “employees,” are a different story. And that difference is essential to understand how 1099 “employees” work and avoid the repercussions of employee misclassification.
What is a 1099 employee?
1099 “employees” are nonemployee workers who only get paid for the work they perform, without any benefits or tax deductions. Since they aren’t technically employees, people often refer to them as independent contractors, freelancers, self-employed individuals, or sole proprietors. They may be small business owners, depending on how they become an independent contractor.1099 employees have a lot of autonomy over their work, while their clients have a very low degree of control. They don't enjoy regular employee perks, such as office space, paid vacation time, overtime pay, or any type of workers' compensation insurance, but they have the freedom to choose where and when they’re going to work. Independent contractors cover all of their business expenses, including income taxes and self-employment taxes, and receive fewer protections by the Department of Labor (DOL) against discrimination, minimum wage, or maximum working hours.
What are the most common types of 1099 employees (independent contractors)?
Independent contractors usually work on projects that don’t require their constant presence and are not related to the core business activities of the employer: marketing, bookkeeping, customer service, website development, cleaning services for those who have an office, and sometimes even human resources and payroll.
Companies hire independent contractors as consultants for short-term and long-term projects, depending on their role, but it’s never a position with a fixed schedule or full-time working hours.
Imagine a restaurant: you’d hire a chef and waiters full-time since that’s your main business activity and these are your core workers. However, you might hire a 1099 “employee” to update your menu or help with a renovation.
What is the difference between a 1099 contractor and an employee?
People refer to contractors as 1099 “employees” (and refer to regular employees as W2 employees) because of the tax form the IRS requires for each. Employers need to file Form 1099 for every independent contractor they work with, and Form W-2 for every employee.
Other than these tax forms, the main differences between W-2 employees and 1099 contractors are:
- Work schedule: employers determine working hours for their employees, but not for independent contractors
- Employee benefits: employees receive mandatory benefits and perks according to their state laws (such as social security, medicare, health insurance, unemployment insurance, paid time off, etc.), while independent contractors don’t have this right
- Tools and equipment: employers provide the necessary tools for their employees, but contractors work with their own
- Training and onboarding: employees go through the onboarding process when they join a company and receive training from their employers, while 1099 “employees” are already trained professionals
Read more about the difference between W2 employees and 1099 contractors.
What is employee misclassification?
Employee misclassification refers to the wrong categorization of employees as independent contractors to avoid the burden of taxes and reduce the total employer costs for each employee.
Since the line is blurry, and the IRS offers guidelines only, it isn't always easy to determine a worker’s status, so some companies make honest mistakes and misclassify their employees accidentally.
When in doubt, you can file the Form SS-8 with the IRS to get the bottom-line verdict. Be aware that contractors also have the right to file this form, and if the IRS determines that you’ve misclassified them, you’re likely facing severe legal and financial penalties, depending on whether you’ve made a mistake knowingly.
Learn more about misclassification risks and how to avoid them.
Which factors determine the 1099 “employee” status?
The IRS also has a test that outlines the three main factors affecting the way you’ll classify a worker.
1. Methods of working (behavioral factor)
If your hire works independently, without you controlling how, when, or where they’re completing the work, you’re probably dealing with an independent contractor. As their client, you only have the right to the outcome of their work. Independent contractors need to have autonomy, and if they don't, they may be an employee.
1. Degree of control (financial factor)
Are you in charge of what tools your worker uses? Do you determine how you pay them or reimburse their business expenses, or when they can take a day off? With a higher degree of control comes a high probability that you need to upgrade their status to a regular employee.
2. Type of business 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 contractor. However, suppose you have a dedicated person who works for a prolonged period on your social media activity with daily communication. In that case, they are an essential part of your team and should have employee status.
Learn more about how to convert an independent contractor to an employee.
What are the benefits of hiring a 1099 employee?
In some situations, hiring 1099 “employees” makes more sense than hiring W-2 employees. Your business may choose to hire independent contractors because:
- Your total employer expenses will be lower, as you don’t need to pay the contractor’s employee benefits or licensing fees for tools
- You don’t need to provide training for the contractor since they invest in their own education and skill development
- You don’t need to provide the contractor with equipment (laptops, monitors, etc.)
- You can easily hire contractors for short-term projects or an unexpected increase in workload and part ways their services are no longer required
What is the benefit of being a 1099 employee?
Being an independent contractor has its perks compared to an employment type of relationship. Most contractors prefer this type of business relationship because:
- They have more independence when making decisions about how they’re going to perform their work
- They can set their own working hours and have a flexible schedule
- They can control their own work-life balance thanks to this flexibility
They may earn more money than when working for a single employer
Learn more about the pros and cons of hiring an independent contractor and being one.
What paperwork do 1099 employees need?
Although independent contractors are not your employees and they’re not on your payroll, you need to document your collaboration in a few ways.
Independent contractors need to sign a written contract with their clients.
The contract should state all of the important info about both parties and methods of payment, expectations, and penalties. Sometimes, the agreement between the two parties is verbal, but it’s much easier to manage the collaboration (and end it) if all the points are documented.
To calculate and file their taxes correctly, independent contractors need to provide their clients with info about their business through a tax form.
If they’re US citizens, they need Form W-9, while foreign individuals or business entities need to submit Forms W-8BEN and W-8BEN-E, respectively. These forms contain several important pieces of information from your contractor, one of them being the taxpayer identification number (TIN).
When the time comes to file taxes, contractors turn in the 1099-NEC to the IRS. You need the TIN to fulfill Form 1099-NEC. In 2020, the previously used Box 7 of Form 1099-MISC, and a new form, previously withdrawn, took its place: Form 1099-NEC.
What taxes does a 1099 employee pay?
US-based 1099 workers are responsible for filing their own taxes. Employers pay payroll taxes for their employees, whereas independent contractors pay a self-employment tax to cover their contribution to social security and medicare taxes.
They also need to pay income tax. A contractor can calculate their total taxable income by writing off all the deductions. Then, they can check the tax brackets for the corresponding tax year to see what category they belong to and calculate how much they owe for tax filing.
What's the self-employment tax rate in 2022?
Independent contractors pay taxes at a rate of 15.3% on their income to cover the FICA taxes. FICA taxes consist of two parts: a 12.4% Social Security tax and 2.9% Medicare tax, paid on the total of an independent contractor’s combined wages, tips, and net earnings, according to the IRS.
Read more about it in our guide to independent contractor taxes.
What can a 1099 employee write off?
Another important benefit of working as an independent contractor is tax deductibles. If you decide to run your own business, which is the case for all independent contractors, there are plenty of business-related expenses you can write off to receive a refund in your tax return.
The IRS recognizes the costs every business owner has, such as home office real estate, advertising, commissions, travel expenses, and other 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.
How do 1099 employees get paid?
They usually have a specific fee and whether they’ll get paid by the hour or by the project is up to them and their clients.
If paying foreign independent contractors, you need to find the best international money transfer solution for both parties: SWIFT, money transfer companies, or an agency of record (AOR), if you’ve hired the contractor through them.
Learn more in our guide to paying independent contractors.
FAQs about 1099 employees
Do 1099 employees have to give two weeks' notice?
It depends on the agreement between the contractor and their client. If the agreement is verbal, it’s up to the contractor. If they want to show good faith and end the collaboration on good terms, it’s always best to give a client at least a 10-day notice. If the contract has a notice provision, either party must give however much notice the contract stipulates.
Can you terminate a 1099 employee?
You can’t fire a 1099 contractor in the traditional way. But, if you’re not happy with your contractor’s work or the project they’ve been working on has simply come to an end, you can terminate your business relationship.
If you have a written contract, the best practice is to notify the contractor in writing–via email, for example.
Can you offer a 1099 employee a bonus?
Yes, you can give a contractor a bonus if they exceed your expectations, complete the project before the deadline, or renew the contract.
To avoid potential employee misclassification risks, it’s best to include a bonus clause in your written agreement, with clear criteria and calculations explained.
Do 1099 employees get health insurance?
Independent contractors don’t get their health insurance covered by the employer but can apply for it on their own. They can enroll in the marketplace health insurance service operated by the government and find a wide range of health plans that can also cover their families. Contractors may be eligible for different tax credits and low-cost plans depending on their household size, income, and other factors.
Is a 1099 employee covered by workers' comp?
Unfortunately, they aren't. W-2 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, they do not receive perks like workers' comp.
Are 1099 employees self-employed?
According to the IRS, an independent contractor is 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, and web designers.
However, not all self-employed workers are independent contractors. Some of them can also be merchants, providing goods instead of services.
What's the difference between a 1099 employee and a subcontractor?
Companies hire independent contractors for every service they need but aren't able to perform amongst their employees, but sometimes the work is too big for just one person. In that case, the contractor can hire a subcontractor.
A subcontractor is a worker who is assigned a portion of an existing work by a principal contractor. Depending on the contract between the company and the principal contractor, the contractor may hire subcontractors to do the work.
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