An independent contractor is a 1099 employee, who provides services to a company but is not an official employee. The term 1099 employee is a misnomer. The term is derived from the Internal Revenue Service's (IRS) Form 1099, which contract workers are required to complete to report their earnings.
1099 employees have more flexibility w 2 employees in choosing their work schedule, projects, and clients, but they are also responsible for managing their business expenses, including equipment, supplies, and workspace. 1099 employees include freelancers, consultants, self-employed workers, and sole proprietors.
Contractors typically work under a written contract with an organization that specifies what each party is expected to do. While these contracts may be exclusive in some cases, many contractors work for multiple clients and projects simultaneously.
What are the most common types of 1099 employees (independent contractors)?
Independent contractors, also known as freelancers or self-employed individuals, are individuals who provide goods or services to businesses or clients on a project basis or for a set period, rather than as traditional employees. Independent contractors typically work for multiple clients or businesses, rather than being employed by just one company. They are usually not related to the core business of the employer.
Examples of independent contractors include freelance writers, graphic designers, web developers, consultants, accountants, and other professionals who provide specialized skills or expertise to businesses or clients. Independent contractors can also include workers in trades such as construction, plumbing, or electrical work, as well as gig economy workers such as ride-sharing drivers or delivery drivers.
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What is the difference between a 1099 contractor and an employee?
Key differences between a 1099 contractor and an employee are as follows:
An employee works under a contract of employment with an employer, while a 1099 contractor works under a contract for services with a client or company.
Control and Independence
An employee is typically subject to the control and direction of the employer, who has the authority to dictate how the work is performed. In contrast, a 1099 contractor usually has more independence and control over how they complete the work.
Employees have income taxes, Social Security, and Medicare taxes withheld from their paychecks by the employer, while 1099 contractors are responsible for paying their own taxes, including self-employment taxes.
Employees may be eligible for various benefits the employer provides, such as health insurance, retirement plans, paid time off, and worker's compensation. In most cases, 1099 contractors are not entitled to these benefits and must arrange their own.
Labor Laws and Protections
Employees are protected by various labor laws, such as minimum wage laws, overtime pay, and employment discrimination laws. These laws generally do not apply to 1099 contractors, who are considered self-employed.
Duration of Engagement
Employees typically have an ongoing, long-term relationship with the employer, while 1099 contractors are often engaged for a specific project or a fixed period. Contractors are more likely to work on a project-by-project basis or have multiple clients simultaneously.
Overall, the main difference between a 1099 contractor and an employee is the degree of control and independence they have in their own schedule of work and how they are taxed.
What if you misclassify a contractor?
Employee misclassification is a term used to describe a situation in which an employer improperly classifies a worker as an independent contractor rather than an employee. This misclassification can have significant legal and financial implications for the employer and the worker.
Under the law, employees are entitled to certain benefits and protections, such as minimum wage and overtime pay, workers' compensation insurance, unemployment insurance, and tax benefits. Independent contractors, on the other hand, are self-employed and are not entitled to these benefits and protections.
When an employer misclassifies an employee as an independent contractor, they may be attempting to avoid paying taxes and providing benefits. This can lead to legal and financial penalties for the employer and a loss of benefits and protections for the worker. It is essential for employers to properly classify their workers, as misclassification can have serious consequences.
What paperwork does a 1099 employee need?
Here are some of the key paperwork requirements for a 1099 employee:
Contract or Agreement
When an employer hires an independent contractor, they need to sign a written agreement. It is important to have a written contract or agreement in place with a 1099 employee that outlines the terms of the engagement, such as the scope of work, payment terms, and duration of the project.
If your workers are established as contractors, however, you'll need to file the following:
This form can be used to request the correct name and Taxpayer Identification Number, or TIN, of the contactor. The W-9 should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.
This form 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 obligations and pay their own taxes.
What taxes does a 1099 employee pay?
Taxes vary according to each worker's status and how much is paid to each worker. A 1099 employee, also known as an independent contractor, is responsible for paying several different types of taxes, including:
- 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
It is important for independent contractors to keep track of their income and expenses and to make estimated tax payments throughout the year to avoid penalties and interest charges.
These tax requirements are only indicatory and should not be considered exhaustive of all tax requirements a 1099 employee must meet. It is recommended to get advice from established 1099 service providers — such as Skuad —to navigate the tax complexities to stay compliant and pay employment taxes.
How do 1099 employees get paid?
Unlike full-time employees, 1099 employees or independent contractors do not get regular salaries and aren’t on a company’s payroll. Depending on the agreement between the contractor and the business owner or employer, their payroll may be processed at an hourly rate or a fixed fee for the project they work on. Instead of pay stubs, they usually receive invoices for the task performed.
Benefits of Hiring a 1099 Employee
There are several benefits to hiring freelance workers as opposed to traditional employees. Here are some of the advantages:
Hiring a 1099 employee can be less expensive than hiring a traditional employee because you don't have to pay for office space, paid sick leave, or other employee benefits.
They can be hired on a project-by-project basis, allowing businesses to be more flexible with their workforce.
When you hire a 1099 employee, you are not responsible for paying their Social Security or Medicare taxes, as well as unemployment taxes.
Reduced administrative burden
Since you don't have to provide employee benefits, you don't have to deal with the administrative tasks associated with managing them.
They often have specialized skills that can be difficult to find in traditional employees.
Contractors tend to be highly motivated and productive, as they are often working on a project-by-project basis and need to complete work quickly to move on to the next project.
In summary, hiring a 1099 employee can be a cost-effective and flexible way to obtain specialized skills and increase productivity. However, it's important to note that 1099 employees don't have access to employee benefits, which may make them less desirable to some workers.
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Frequently Asked Questions
What are the rules for a 1099 employee?
A 1099 employee is responsible for paying their own taxes and is not entitled to benefits such as health insurance or paid time off. They do not have any taxes withheld from their paychecks. 1099 employees must have their own business insurance, such as liability insurance.
Who pays taxes for a 1099 employee?
A 1099 employee is responsible for paying their own taxes, including both income and self-employment taxes. Unlike traditional employees, their employer does not withhold taxes from their paychecks, and they are expected to make regular tax payments throughout the year.