Everything You Need to Know about a 1099 Employee

Everything You Need to Know about a 1099 Employee

Introduction

Global expansion and hiring involve various compliance requirements, such as local taxes. If a US-based employer hiring foreign contractors, you must fill in Form 1099-MISC (Form 1099) to stay tax-compliant. To do so, you need to know several related concepts, forms, and requirements, including:

  • Form 1099-NEC
  • 2022 Form W-9
  • 1099 employee
  • 1099 contractor
  • 1099 benefits
  • 1099 advantages and disadvantages
  • 1099 service providers

This short guide includes all you need to know about Form 1099 to stay compliant when hiring independent contractors and employees.

What is a 1099 employee?

A 1099 employee is a worker classified as someone for who an employer has paid $10 in royalties or $600 in income payments (such as prizes and awards, healthcare payments, rent, etc.). They are also employees you may have control over to perform specific duties and are classified as employees or contractors for tax reporting purposes.

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What are the most common types of 1099 employees (independent contractors)?

Form 1099 covers different types of workers whose income is taxable according to U.S. tax laws and regulations, including:

  • Common law employees. You directly manage these workers, dictating what they do and how the work should be done.
  • Statutory employees. These are workers who, despite being classified as "independent contractors," are still classified as "employees" by statute (and hence "statutory employees") if
  • They are drivers delivering your products as your agents or are paid on commission to do so
  • They are full-time insurance sales agents whose primary function is to sell life insurance or annuity contracts for one company.
  • They are individuals who work at home and whose primary function (for you) is to work on materials or goods you returned to you or a partner you identify.
  • They are full-time salespersons whose primary function is to deliver your orders from wholesalers, retailers, contractors, etc.
  • Direct sellers, classified as statutory nonemployees if
  1. Service payments are generated from sales activities, not based on hours worked
  2. Services are provided according to a written contract
  • Licensed real estate agents, classified as statutory nonemployees if
  1. Service payments are generated from sales activities, not based on hours worked
  2. Services are provided according to a written contract
  • Certain companion sitters, classified as statutory nonemployees if not working for companion sitting placement services
  • Independent contractors. This worker category includes a wide range of professionals, including doctors, lawyers, accountants, contractors, etc., that practice a certain profession independently from any employer's control of what is done and how to do it. Employers usually hire international contractors (who may be subject to a foreign independent contractor 1099 tax) for various reasons, including getting much-needed talent aboard, cutting hiring costs, and expanding globally.

What is the difference between a 1099 contractor and an employee?

This question could be given in one word: control. If a worker performs a job for an employer but is under the employer's direct control (i.e., work, whereabouts, duration, etc.), a worker is said to be a 1099 employee. Conversely, a worker is free to deliver a job without any control except for the agreed-on job deliverables. In that case, a worker is said to be a 1099 contractor.

What is employee misclassification?

Determining whether your workers are employees or independent contractors is critical to stay tax-compliant. If you fail to do so, you're liable for employment taxes for misclassified workers. Moreover, you also disqualify from getting relief provisions for employers who have a reasonable basis for classifying a worker as an independent contractor.  

The consequences of employee misclassification are far-reaching. In addition to employees filing Form 89819 (Uncollected Social Security and Medicare Tax on Wages) to claim an employer's contribution to uncollected Social Security and Medicare taxes (with a high possibility for a 1099 misclassification lawsuit), employers may be subject to regulatory penalties. If not, business closure in case of repeated offenses. This is more than just a costly headache; it can also damage your company's reputation.

Which factors determine the 1099 “employee” status?

The answer: it's about how you classify your workers. Depending on control, workers can be classified as employees or contractors. This is a generic (but not a magical) formula to determine if a worker's status is "employee" or not:

More Control Over Work Done By Employer = Employee

Three factors, however, are generally used to determine a worker's status:

  • Behavioral. This is about whether you, as an employer, control what is done and how your worker does it.
  • Financial. This is about how payments made to workers are made, such as reimbursements, work supplies, etc.
  • Type of relationship. This concerns whether you and your workers have a written contract, including statutory benefits such as pension plans, health insurance, etc.

What is the benefit of being a 1099 employee?

Employees — particularly common law statutory employees — generally enjoy far more entitlements than contractors. Having guarantees in law to receive health insurance, unemployment benefits, and pensions, a 1099 employee has "returns on investments" made in contributions to social security, Medicare, and more.

Conversely, contractors — who usually get higher pay than employees — are not entitled to such statutory benefits. As such, they are liable to excessive care and social benefits costs paid independently at market price.

What paperwork do 1099 employees need?

The 1099 checklist for employees depends on whether you've established your workers as employees or independent contractors.

If your workers are employees, you'll need to file Form 1099-MISC for each person you have paid — in royalties or equal to or more than $600 — during the year.

If your workers are established as contractors, however, you'll need to file the following:

  • Form W-9, which is used to request a taxpayer's (your contractor's) correct name and identification number
  • Form 1099-NEC, which replaces box seven on Form 1099-MISC to report payments of nonemployee compensation (NEC) as of Tax Year 2020

In all cases, you must keep a complete record of your tax forms (for at least four years for Form W-9) and ensure your contractors (if using subcontractors) are aware of their tax commitments.

What taxes does a 1099 employee pay?

Taxes vary according to each worker's status and how much is paid to each worker. US employment taxes are complex to understand independently. Thus, you may need 1099 service providers to handle your and your workers' tax requirements and forms such as Form 1099-MISC, 1099 NEC Form, W-9, and more.

For current purposes, a 1099 employee is required to pay the following:

  • Federal Income Tax, using Form W-9 and Employee's Withholding Certificate
  • Social Security and Medicare Taxes, set at different rates
  • Additional Medicare Tax, at a rate of 0.9%, only when an employee's income exceeds $200,000 a year
  • Self-Employment Tax for self-employed individuals

These tax requirements are only indicatory and should not be considered exhaustive of all tax requirements a 1099 employee must meet. Informed advice from established 1099 service providers — such as Skuad — should relieve your mind of all tax complexities to stay compliant.

How do 1099 employees get paid?

If established as an employee — common law or statutory — a 1099 employee gets paid according to applicable labor laws. Generally, employees are paid on an hourly, daily, weekly, or monthly basis. In many jurisdictions, statutory holidays, paid time off (PTO), overtime, and additional benefits are among the compensation components to which employees are entitled.

To attract best-in-market employees, you need first to properly establish your worker status as employees so you can pay your employees timely, competitively, and compliantly.

Pay your 1099 employees seamlessly with Skuad

Form 1099 is one of the essential tax forms a US-based employer needs to report to the Internal Revenue Service (IRS). You must establish your worker status to avoid misclassification and possible regulatory penalties.

Generally, degrees and means of control determine whether a worker is an employee or an independent contractor. That's why you need to identify your worker status carefully. Skuad enables you to efficiently file and report your required tax forms (Form 1099MISC, Form 1099-NEC, Form 89819, and more).

To know more about Skuad, book a demo today.

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