What is a 1099 employee?
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 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
