What is a 1099 employee

The information below covers US labor laws.

A 1099 employee is a self-employed individual, freelancer, or independent contractor who partners with clients rather than being directly employed by them. The label "1099 employee" stems from the 1099-MISC form they use to declare income to the IRS.

These workers distinguish themselves from traditional employees by setting their own schedules, supplying their own work tools, and managing their own taxes, including those for self-employment. Many work as freelancers or operate their own small businesses, enjoying a level of autonomy not typically found in standard employment relationships.

Key characteristics of an independent contractor include:

• Setting their own work schedule.
• Providing their own tools and equipment.
• Handling their own tax payments, including self-employment taxes.
• Potentially operating as a small business owner.

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).

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?

Independent contractors can benefit your team in several ways.

• 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
• You can hire from abroad more easily as you don’t need to set up a foreign entity to hire a contractor

Employee classification issues

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 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.

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

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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