In a world of the gig economy, where rideshare drivers, translators, editors and healthcare workers are all classified as independent contractors, businesses must understand the rules surrounding these types of employees. 1099 employees bring several advantages to the workplace, including cost savings, flexibility and access to specialized skills.
What is a 1099 Employee?
As the labor market grows more diversified, businesses rely on a 1099 employee to meet their business goals. Whether or not it makes sense to hire these contract workers depends on your company’s specific needs and ability to offer attractive compensation. However, the risks of misclassifying employees as contractors are significant and can result in tax penalties or lawsuits. Unlike full-time employees, 1099 employees do not receive any benefits from the companies for which they work. They also do not pay payroll taxes and are responsible for paying their income taxes. You must provide them with the correct tax forms and ensure they have enough money to cover all their expenses throughout the year.
In addition, because independent contractors are not considered employees of your business, they cannot collect unemployment insurance payments. This is important because they must retain their job to be eligible for benefits. However, during the COVID-19 pandemic, the federal government made funds available to small businesses, including many 1099 employees, to help them cover lost income.
Typically, contractors are self-employed individuals with flexible working schedules and choose which jobs to accept. They can be consultants, freelancers, or skilled tradespeople such as electricians and plumbers who operate their businesses and complete work on a contract basis. Additionally, gig economy workers such as rideshare drivers and food delivery couriers are commonly referred to as 1099 employees.
How Do I Classify a Worker as a 1099 Employee?
Business owners and HR departments must understand the distinction between employees and independent contractors to avoid tax penalties or lawsuits. While contract workers can provide significant benefits, they must be properly classified to ensure compliance with the law and a smooth working relationship. Typically, contractors work under a written contract that sets forth the terms of their engagement.
These contracts may include details of the scope of the work, payment structure, and a clear start and end date for the project. Independent contractors are responsible for covering their taxes, which can be much more expensive than payroll taxes incurred by traditional employees. The definition of a 1099 employee can vary by state and industry. Some common examples include freelancers, consultants, skilled tradespeople (electricians and plumbers), on-demand service providers (e.g., Uber drivers and Instacart delivery couriers), and crowd workers.
The majority of these individuals are self-employed and have a contract relationship with the paying company that is short-term in nature. Hiring a 1099 worker can benefit businesses, particularly during labor shortages or rapid growth. In addition to cost savings, it can be easier for organizations to quickly engage these individuals for projects or tasks that require specialized expertise. However, several challenges come with hiring 1099 employees, including tax reporting obligations, communication issues, and establishing clear contract agreements.
What Are the Disadvantages of Classifying a Worker as a 1099 Employee?
One thousand ninety-nine workers are not subject to the same regulations governing traditional employees, including tax rules, overtime laws, workers’ compensation coverage, etc. This makes hiring them for a specific project or role easy without worrying about complying with federal employment standards. However, this freedom comes at a cost. Since 1099 employees are responsible for paying their taxes — including the employer and employee portions of Social Security and Medicare — they have to make estimated tax payments throughout the year to avoid a large tax bill come filing season.
In addition, they are not eligible for the many benefits offered to W-2 employees, such as health insurance, vacation time and retirement contributions. In addition, misclassifying a worker as a 1099 employee can lead to significant financial penalties from the IRS. You may be required to pay back wages, overtime, and other employment-related benefits due to your mistake. And you could be blacklisted from future government contracts due to your poor business practices. Despite these disadvantages, hiring 1099 workers can be a valuable asset for businesses needing specialized skills or short-term resources. Many companies use freelancers to fill gaps in their workforce during busy times or to bring in fresh ideas from outside the company.
How Can I Manage a 1099 Employee?
Whether you need extra talent to complete a project or a temporary staffer to help during the busy season, 1099 employees can add a much-needed boost to your business. But managing a 1099 employee comes with a different set of challenges than working with W-2 employees. First, it’s important to make sure you correctly classify your workers.
Misclassifying an employee as a 1099 employee can have serious tax and legal consequences for your organization. To avoid misclassification, carefully evaluate each worker’s situation and the type of work they do to determine whether they meet the criteria for the independent contractor classification. Second, understand that 1099 employees must pay self-employment taxes, including Social Security and Medicare — and income tax at the rates outlined by the IRS. It’s important to make estimated tax payments throughout the year to prevent an unexpectedly large tax bill come filing season.
Third, most labor laws do not cover 1099 contractors, so they’re typically not entitled to benefits like sick days or retirement. For this reason, it’s a good idea for companies to create a written agreement with each independent contractor outlining their expectations and responsibilities. Finally, when it comes time to pay your 1099 contractors, be sure you have a system that makes the process quick and easy. For example, with Everee, you can easily track your workers’ hours and then quickly generate payroll to pay them daily, all without the hidden fees and paperwork that other services charge.