Businesses have many choices when it comes to building up their staff. One of those choices is to have 1099 employees who work as independent contractors. Independent contractors provide businesses with flexibility when it comes to how much work needs to be done and when it needs to be completed. There are also certain financial and legal benefits to using 1099 employees. That said, understanding how 1099 employees are classified and other nuances to working with contractors will make this kind of employment strategy a success.
Knowing the definition of a 1099 employee is not just a formality business owners need to check off. It’s crucial to know who a 1099 employee is if you are to remain on the right side of wage and tax laws. More importantly, knowing the differences between a 1099 employee vs. a W-2 employee can help you plan for your business’s labor needs accordingly.
Today’s guide helps uncover all you need to know about the 1099 employees.
What is a 1099 employee?
A 1099 employee is an independent contractor who provides a service to a company but is not an official employee of that company. But the term ‘1099 employee’ is actually a misnomer. The correct terms for a 1099 employee are independent contractor, non-payroll worker, or self-employed worker. The term 1099 employee most likely comes from the 1099-NEC or 1099-MISC form that businesses use to report payments made to contractors.
1099 employees examples
There are a wide range of 1099 employees examples in different industries. Here are some of the most common 1099 employees:
- Gig worker: This is an independent contractor that performs temporary jobs using an app or online labor marketplace. Common examples are rideshare and delivery drivers.
- Freelancer: This independent contractor works on a short-term basis and usually offers a specialized set of skills. They’re often paid by the project or hour and work for multiple clients simultaneously. Freelancers are common in marketing, finance or design disciplines.
- Outsourced workers: This is a third-party team of workers you contract temporarily to help you perform certain tasks. Sometimes outsourced workers can be considered contingent workers or temp employees. For example, a temporary sales rep you hire during busy seasons.
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What is a 1099 contract employee?
A 1099 contract employee is just another name for an independent contractors. 1099 workers tend to have a contract agreement with an employer, hence the name “1099 contract employee”. 1099 contracts lay out the working agreement between the business and the 1099 employee, such as compensation structure and the period of time the contractor and business will be working together. These contract agreements need to be in place before any work can begin.
What are the rules for 1099 employees?
There are certain 1099 employee rules that businesses need to be aware of. Here are some of the rules for 1099 employees that employers need to keep in mind:
- 1099 employees must be properly classified. Workers cannot simply be designated as 1099 employees. They must meet the legal criteria to qualify as an independent contractor. These qualifications can differ state-by-state.
- Independent contractors must work independently. This means 1099 workers should not be told how or when to do their work. 1099 employees should also use their own equipment and tools, and work from their own office space or home office.
- Employers need an IRS W-9 Form on file for their independent contractors. The information on this form makes sure the independent contractors details are accurate for tax purposes. Additionally, employers need to send 1099-NEC or 1099-MISC forms to their 1099 employees and the IRS after the tax year has ended.
- 1099 employees still need written employment agreements. Even though 1099 employees are not traditional W-2 employees, it’s still a good idea to have a written agreement in place. This agreement should outline the expectations of both the 1099 employee and the employer.
- 1099 employees are not entitled to employment benefits. 1099 employees are not provided with traditional employment benefits, such as vacation days or sick days.
- 1099 employees are not covered by most labor laws, which means 1099 employees are not entitled to certain protections like federal or state minimum wage or overtime pay.
- 1099 employees must pay their own taxes. 1099 employees are responsible for paying their own self-employment taxes, as well as income taxes. 1099 employees are not to have any taxes withheld from their paychecks.
- 1099 employees must have their own insurance. 1099 employees must have their own business insurance, such as liability insurance. 1099 workers are not covered under the employer’s insurance policy.
- 1099 employees must be paid for all the work they complete. Many businesses use a 1099 payroll platform to making paying contractors easy and fast. To be compliant, 1099 workers should not be paid using peer-to-peer apps like Venmo or Paypal, unless the employer is using a business account and reports payments made.
- Working agreements between 1099 workers and employers can end at any time—as long as the terms of the separation in the contract agreement are honored. 1099 agreements are not the same as traditional employment contracts, which can often be more difficult to terminate.
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1099 employee vs. W-2 employee
Now that we know who 1099 employees are, it’s important to understand the key differences between 1099 employees vs W-2 employees.
First, 1099 employees are not under the control of the company they work for. 1099 employees are considered to be in business for themselves. This means 1099 employees can work for multiple companies at the same time and are not required to complete any set number of hours per week. W-2 employees are considered to be under the control of the company they work for. W-2 employees can only work for one company at a time and are typically required to complete a set number of hours per week.
Next, 1099 employees do not receive any employment benefits. 1099 employees are not entitled to traditional employment benefits, such as vacation days, sick days or health insurance. W-2 employees typically receive these types of benefits from their employer. 1099 employees are also not protected by anti-discrimination laws, which means they can be discriminated against without any legal recourse. 1099 employees are also not guaranteed to be paid minimum wage. 1099 workers are only entitled to the agreed-upon payment, regardless of how many hours they work. W-2 employees, on the other hand, are guaranteed to be paid at least minimum wage for all the hours they work.
Finally, as a business owner, you don’t have certain tax obligations for 1099 employees. 1099 employees are responsible for paying their own taxes, which means you don’t have to worry about withholding taxes for 1099 employees or paying payroll taxes. However, if you paid an independent contractor more than $600 in the previous year for services rendered, you’ll need to submit a 1099-NEC form. On the other hand, you do have certain tax obligations for W-2 employees. You are required to withhold taxes for W-2 employees and pay payroll taxes. W-2 employees also entitled to employee benefits like paid time off, overtime pay and workers’ compensation.
Ultimately, 1099 employees present a business with less tax burden when compared to the W-2 worker.
Can you be both a 1099 and W-2 employee?
Workers cannot be both a 1099 and W-2 employee for the same company at the same time. You must classify a worker as either a 1099 or a W-2 employee at one time. However, it’s possible for a worker to be a 1099 employee for one company and a W-2 employee for another company. In rare cases, certain workers may have been a 1099 independent contractor for some portion of year and became a W-2 employee later in the year. In this case, the employer would need to file both a 1099-NEC and W-2 for the worker.
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How do you classify a worker as a 1099 employee?
Classifying a worker as a 1099 employee is not a black and white process. There are many nuances to the situation, and you will have to classify each worker individually to arrive at the right classification.
Whether a worker is a 1099 employee will depend largely on the degree of control an employer has over the worker. According to the IRS, a worker is most likely an independent contractor if the employer controls only the work’s result, not what or how the worker completes the job.
Further, the IRS relies on these three Common Law Rules;
- Behavioral: Does the business control what the worker does and how the worker does their job?
- Financial: Does the client control the business aspects of the worker’s jobs? Business aspects include things like how the worker is paid, who provides the tools to complete tasks, and whether the expenses will be reimbursed.
- Type of Relationship: Is there a written contract between the worker and paying business? Will the worker receive benefits such as insurance, vacation pay, or a pension plan? Is the task performed by the worker a key aspect of the business? Will the working relationship continue even after task completion?
The employer must carefully review each worker individually and note that what works in one situation doesn’t necessarily work in all situations. The factors below might be a telltale sign that a worker is a W-2 employee and not a 1099 employee.
- You provide the worker with training on a certain method of job performance
- You provide tools and materials to complete tasks
- You require the worker to follow a set schedule
- You provide benefits such as medical insurance, vacation, pension plans, overtime pay, etc
In most cases, an independent contractor or 1099 employee can:
- Refuse certain jobs
- Completes tasks using their own methods
- Cater for their own tool provision
- Set and follow their own schedule
What if you’re unsure whether to classify a worker as a 1099 employee?
If you have performed the common law rules test but are still unsure, employers can file Form SS-8 with the IRS. This form is known as the Determination of Worker Status for the purposes of Federal Employment and Income Tax Withholding. The worker can also file the form to determine their correct classification. The IRS will then review the facts you’ve presented and determine a worker’s status. However, the IRS can take as much as six months before giving you a reply.
What paperwork do you need for a 1099 employee?
When you hire a 1099 employee, the first thing you need to do is get a W-9 form from the worker. The W-9 form provides your business with the worker’s Social Security number or Individual Taxpayer Identification Number (ITIN). You’ll use this number to prepare and file IRS Form 1099-NEC at the end of the year.
As the employer, you’re responsible for filing Form 1099-NEC. You must file a 1099-NEC for each 1099 employee you paid $600 or more to during the year. You should file 1099-NEC by January 31st of the year following the tax year in which you made the payments. For example, if you pay a 1099 employee in 2022, you should file 1099-NEC by January 31, 2023. You should also give the 1099 employee a copy of Form 1099-NEC. This form serves as a notice to the 1099 employee that you’ll be reporting their earnings to the IRS. The 1099 employee can use this form when filing their taxes. You can do this electronically or by mailing paper copies.
If you don’t file 1099-NEC or file it late, you may have to pay penalties. You may be able to avoid penalties if you have a good reason for not filing 1099-NEC on time. For example, you may not have to pay a penalty if you can show that you made a reasonable effort to comply with the law but were unable to do so.
How do you pay 1099 employees?
Once classification and introductory paperwork is out of the way, you need to set up proper payment channels for 1099 employees. Typically, 1099 employees are paid differently than W-2 employees. 1099 workers are typically usually after the completion of a project. 1099 contractors usually submit invoices to their clients for payment, and they’re free to set their own rates.
Paying 1099 contractors can be done in a few different ways. The most common method is to issue a check or direct deposit to the 1099 contractor after they submit an invoice. Some employers set up payments through their payroll system or manage payments through platforms like Bill.com.
Pay 1099 employees everyday
With the popularity of gig platforms, more and more 1099 employees are getting paid daily for work performed. Companies like Uber and Lyft have popularized this way of paying 1099 contractors. Daily or weekly payments may be a good option if you don’t want to wait for 1099 contractors to submit invoices or if you’re worried about them forgetting to invoice you. It’s also an attractive benefit in a tight labor market.
To set up daily or weekly payments, you’ll need to track the 1099 contractor’s hours worked in a time-tracking system. Once you have the hours worked, you can generate payroll and pay 1099 contractors through direct deposit or check just like you would with W-2 employees. With a platform like Everee, employers can pay 1099 employees and their W-2 workers using the same tool.
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When is a 1099 employee the right fit for your business?
1099 employees can be a great addition to your business, but they’re not right for every situation. Contractors are usually best suited for project-based work or one-time tasks. In most states, 1099 contractors make up the majority of workers at gig companies and marketplaces, because workers are free to choose their own schedule and work as little or as much as they want. They can also be a good option if you need someone with a specific skill set for a short period of time, like a door-to-door sales representative during the summer season.
Of course, 1099 employees have some downsides. Because they’re not considered employees, you don’t have the same level of control over them as you would with W-2 workers. 1099 contractors are also more likely to leave your company for a competitor since there’s no employment contract binding them to your company.
While 1099 employees are affordable and easily available, retaining top-performing independent contractors takes effort on the part of employers. One way your business can go the extra mile is by providing 1099 employees with fast payments. Everee makes it easy to pay 1099 employees—and workers can get their money daily without hidden fees. Want to pay your contractors at scale? Take a look at Everee here.