What is a 1099 employee

The information below covers US labor laws.

A 1099 employee is a self-employed individual who provides services to clients under specific contractual agreements. They are also sometimes referred to as “gig workers” or “freelancers.” Unlike traditional employees, these professionals operate their own businesses, often as sole proprietors, and are not integrated into the client's organizational structure.

The designation "1099" refers to the IRS Form 1099-MISC, which businesses use to report payments made to non-employees. This form is issued to self-employed contractors who have been paid $600 or more in a tax year. For detailed information on this form, refer to the IRS guidelines.

Key characteristics of 1099 employees

• Autonomy: 1099 contractors have the freedom to determine how, when, and where to complete their work, provided they meet the agreed-upon deliverables.
• Tax obligations: They are responsible for managing their own taxes, including self-employment taxes, and must often make quarterly estimated tax payments. For more on these responsibilities, see the IRS Self-Employed Individuals Tax Center.
• Absence of employee benefits: Unlike W-2 employees (salaried workers), 1099 contractors do not receive benefits such as health insurance, paid time off, or retirement plans from the businesses they work with.
• Project-based engagements: They typically work on specific projects or tasks rather than holding ongoing roles within an organization. They rarely receive a minimal guarantee of employment, and are hired, as required, on an ad hoc basis.

Full-time employee vs. independent contractor

Full-time employees (also known as W-2 workers because of the W-2 form they fill out when filing taxes) typically work for one employer and have a salary paid in regular intervals. The employer has a higher degree of control over their employees’ work schedules and workload, provides the workers with tools, equipment, and training necessary for the job, and offers employee benefits and perks (such as private health insurance or a learning budget).

Independent contractors work with multiple clients at a time and have a more flexible working schedule. They are usually hired as external experts who need little to no training and onboarding and already have their own tools and equipment for the job, so the client doesn’t refund the contractor’s business expenses.

Statutory benefits also fall under the contractor’s responsibility—the client doesn’t have to pay for:

• Social security taxes
• Healthcare
• Paid time off
• Workers’ compensation
• Pension plans
• Unemployment taxes
• Parental leave
• Sick leave

W-2 Employees also enjoy more rights and protections under the federal and state laws. Independent contractors don’t have the right to minimum wages or overtime pay according to the Department of Labor (DOL).

1099 vs. W-2 forms: understanding the differences

The primary distinction between 1099 contractors and W-2 workers lies in their relationship with the business:

• 1099 contractor: Operates independently, uses personal tools, or resources, and maintains a high degree of flexibility.
• W-2 employee: Works under the employer's control, often follows a set schedule, and is eligible for benefits and payroll tax deductions.
• W-2 employee: Works under the employer's control, often follows a set schedule, and is eligible for benefits and payroll tax deductions.

Misclassifying employees as independent contractors can lead to significant legal and financial penalties. The IRS provides guidelines to help determine the correct classification, focusing on behavioral control, financial control, and the nature of the relationship. For more details, consult the IRS guidelines on worker classification.

Download our interactive collection of three worker classification tests that help you determine your worker’s employment status.

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.

For example:

• Graphic design
• Writing
• Bookkeeping
• Customer service
• Website development
• Cleaning services
• Human resources
• Payroll

Why hire a 1099 employee?

Engaging 1099 contractors offers businesses the following benefits:

• They offer businesses flexibility, enabling them to act in an agile manner to engage in short-term or urgent projects that require a temporary expansion of the workforce.
• They provide cost savings, especially for short-term projects or specialized tasks, by not holding employees on a permanent payroll.
• Additional savings are realized by the lack of an obligation to provide health insurance or a benefits package.

However, it's crucial to ensure proper classification of such employees to avoid compliance issues. This exempts the business from overseeing the tax burdens of such workers and puts the onus on the 1099 employees to make annual tax returns.

What paperwork do 1099 employees need?

Written agreement

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 if all the points are documented.

You can’t fire a 1099 contractor in the traditional way, but you can end the collaboration with them if you no longer require their services. If you have a written contract, the best practice is to notify the contractor in writing–via email, for example.

Tax forms

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.

How do 1099 employees get paid?

Independent contractors don’t have a fixed salary and aren’t on a company’s payroll. That’s why they don’t receive pay stubs, but send invoices to their clients.

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.

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.

Independent contractors have the right to 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.

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