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Summary: A 1099 employee is also known as an independent contractor or a freelancer. These individuals provide services to companies/clients under a contract and are responsible for their own taxes and benefits.
Today’s workforce looks different than it did just a decade ago. More professionals are choosing independent work, and more companies are hiring flexible, project-based talent.
One term that often comes up in this context is “1099 employee.” While not technically an employee in the legal sense, this phrase is commonly used to describe independent contractors hired to complete specific tasks or services outside of a traditional employment relationship.
Understanding the role of a 1099 worker is essential for both businesses and contractors. It helps ensure proper classification, legal compliance, and successful collaboration.
What is a 1099 employee?
A 1099 employee is also known as an independent contractor or a freelancer. These individuals provide services to companies/clients under a contract and are responsible for their own taxes and benefits. Contracts will include information such as the scope of work, payment terms, and contract duration.
Why is it important to distinguish between a 1099 employee vs. a W-2 employee?
One of the core reasons why it’s so important to distinguish between a 1099 employee and a traditional W-2 employee is that it will help determine the employment rights, taxes, and benefits that they are entitled to.
What is the “three-prolonged test?”
There are some specific questions that you need to ask yourself when you’re trying to determine whether or not to hire a 1099 employee or a W-2 employee.
The Fair Labor Standards Act, or FLSA, doesn’t provide a test for determining whether someone is a 1099 employee vs. a standard W-2 employee, but the US Department of Labor (DOL) and the Internal Revenue Service (IRS) have some guidance through a test called the “three-pronged test” (sometimes called the “common law test”), which looks at the following elements:
- Behavioral control: This looks into how much the company can control how the worker does the job for which they’ve been hired. If the company directs or controls how the work is done, the worker is likely a W-2 employee.
- Financial control: This looks at whether the company can control the economic aspects of a worker’s job, such as the extent to which the worker has unreimbursed business expenses, the method of payment, and the extent to which the worker invests in the facilities used to perform the work. Greater control by the worker over these aspects suggests they are a 1099 employee.
- Relationship of the parties: This examines how the worker and business perceive their relationship. Specifically, what do the contracts describing the relationship say? How permanent is the relationship? Are the services being provided by the worker a key aspect of the company’s regular business? A permanent relationship and key services provided by the worker typically indicate a W-2 employee status.
On top of this, the DOL looks at an “economic reality” test to determine whether a worker is a W-2 employee under the FLSA:
- Economic dependence of the worker: Does the worker rely on the company for their livelihood? If so, they’re more likely to be W-2 employees.
- In business for themselves: If the work the worker performs for the company is just one part of their business activities, they’re more likely to be a 1099 employee.
It’s important to note that there isn’t one single factor that determines whether an employee is a W-2 employee or a 1099 employee — it’s the totality of the situation.
What are the best practices when it comes to managing 1099 employees?
Now, let’s say you have decided to bring on a 1099 employee after adequately classifying them as an independent contractor based on the guidelines above. Here are some quick tips on how to best manage them:
Clear contracts: It’s important to create clear contracts that stipulate the scope of work, deadlines, payment terms, and any other important details. This helps set expectations and prevents misunderstandings, ensuring both parties are aligned on the project requirements.
Draw boundaries: At the end of the day, these workers are contractors, so it’s important to respect the independent nature of their work. Avoid treating them like employees by controlling their work hours, how they perform their tasks, or providing benefits that would be reserved for W-2 employees. Maintaining this distinction is crucial for legal and tax compliance.
Tax compliance: If you pay your contractors \$600 or more in a year, issue Form 1099-NEC to them. From there, make sure that you meet all tax reporting and withholding requirements. Proper tax compliance helps you avoid penalties and ensures that both you and the contractor are adhering to IRS regulations.
Insurance and liability: Check and ensure that your contractors have their own insurance, including workers’ compensation if applicable. This helps manage liability and protects both parties in case of incidents. Confirming that contractors have appropriate coverage is an essential part of risk management.
What platforms can I use to connect with 1099 employees?
Below are some popular freelancer platforms for connecting with 1099 employees for various types of work. It’s important to note that each one has its fee structure.
- Upwork
- Toptal
- LinkedIn ProFinder
- Guru
- 99designs
- Freelancer
- Fiverr
- PeoplePerHour
To learn more, read our article: Where to Hire Freelancers: Top Platforms and Key Benefits of a Flexible Workforce
What are the pros and cons of 1099 employees?
- Pros
Cost savings
Hiring 1099 employees means you can save on employee-related costs, including payroll taxes and benefits.
Flexibility
You can hire contractors as needed, which means that you can easily scale up or down based on your company’s workload.
Specialized skills
Typically, contractors bring specialized expertise, which makes them ideal for short-term projects and specific tasks.
- Cons
Lesser degree of control
As 1099 employees are independent workers, you have limited control over their work hours and methods.
Risk of misclassification
Incorrectly classifying an employee as a contractor can result in legal and financial penalties.
Potential for less loyalty
Contractors may feel less committed to your company’s goals than full-time employees.
Conclusion
The term “1099 employee” may be widely used, but it refers to a very specific type of working relationship: one that is based on independence, flexibility, and self-management. For businesses, hiring 1099 workers offers agility and access to specialized talent. For contractors, it provides freedom and the opportunity to work on their own terms.
When approached correctly, the 1099 model can benefit both sides. Clear contracts, proper classification, and mutual respect are key to building successful partnerships.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
