More workers are looking for flexibility and a rising number of companies seek agile teams. As such, many are choosing to work with independent contractors. The US classifies these as 1099 workers based on their self-employment status.

1099 employees are not the same as traditional ones. There are important differences and key classification rules to consider. Let’s take a look at the definition of a 1099 employee. We will also see how the working relationship with a 1099 employee differs from traditional workers. 

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What Is a 1099 Employee?

A 1099 employee is also known as an independent contractor. The term refers to a person who is self-employed and delivers services following the terms set out in a contract. The "1099" comes from the IRS form 1099-MISC. Companies use this form to report their payments to independent contractors at the end of the tax year. 

1099 employees are not part of a company's payroll as traditional employees would be. They do not receive the same employee benefits, such as health insurance, vacation pay, or retirement plans.

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Difference Between 1099 and Traditional Employee

It’s important to understand how independent contractors differ from traditional employees.

1. Employment Status: A regular employee has a full-time contract with a company. 1099 employees are self-employed and their contract outlines specific deliverables they owe. Due to the type of relationship, they have with the employer, they do not need to follow the company’s standard hours.
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2. Compensation: 1099 employees receive payment based on their contract terms. This could be per hour or per contract. 1099 employees receive compensation on a per-project or per-contract basis. In contrast, traditional employees usually receive a salary or hourly wage. 
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3. Taxes: Employers withhold taxes from their traditional employees’ paychecks. 1099 employees manage their tax payments on their own.
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4. Benefits: Employers offer their full-time staff a variety of benefits, which may include health insurance, retirement plans, and paid time off. Typically, 1099 employees do not receive these benefits.
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5. Work Schedule: Your employees follow the schedule you’ve set out. In a regular office setting, this might be the traditional nine-to-five. 1099 employees work when they choose to and only need to report for meetings or other coordination events.

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Reasons to Hire an Independent Contractor

Most companies need both traditional employees and independent contractors. There are several advantages to bringing on 1099 employees in addition to your permanent staff.

1. Cost Savings: First off, you might save money by hiring an independent contractor. You won’t need to provide benefits, pay for their office space, or manage their payroll. However, contractors will typically work some of those costs into their rates.
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2. Flexibility: An important advantage of hiring independent contractors is flexible scaling up or down. Sometimes, you simply need extra help to move a project forward. Short-term contracts can do that without long-term commitment.
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3. Specialized Skills and Expertise: Companies often hire independent contractors to access skills and expertise they lack on their team. They can come in and bring the sophisticated tools and knowledge needed to execute your projects.
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4. Increased Efficiency and Productivity: In-house teams can sometimes be overwhelmed with a range of tasks. If you need something done quickly and with focus, an independent contractor may be your ideal choice. They will focus all their energy on the project at hand, without distractions.
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5. Access to a Larger Talent Pool: Independent contractors work remotely and so you aren’t limited by geography when hiring them. This means you can access a larger pool of talent, encountering the right fit for your specialized projects.
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6. Reduced Administrative Burden: Since you don’t need to administer benefits or taxes for independent contractors, your HR and finance teams will see less burden. You can instead focus on strategic initiatives, while the contractors go full steam ahead with projects.
     
7. Limited Liability: In addition to a lower administrative border, you also have fewer liabilities when it comes to independent contractors. 1099 employees take care of their own liabilities and insurance. This protects your company from several legal obligations.

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Considerations for Employers and Contractors

While there are advantages to hiring 1099 employees in the US, it’s also important to understand the possible implications of bringing on contractors.

For Employers

1. Classification: It’s crucial to understand when a worker qualifies as an independent contractor. Misclassifying an employee as a contractor can have serious legal implications.
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2. IRS Regulations: Beyond classification, you need to be aware of Internal Revenue Service (IRS) regulations related to independent contractors. Make sure you comply with the correct tax forms and reporting requirements.
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3. Contractual Agreements: Clearly define the scope of work, length of the contract, payment terms, and other details in written contractual agreements.

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For Workers

1. Tax Implications: Self-employed individuals should include taxes and benefits within their rate calculations. They must also ensure proper tax reporting and payments on their own.
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2. Financial Planning: 1099 employees don’t receive some of the standard benefits owed to traditional employees. It’s important to calculate your rates including health insurance, paid time off, retirement, and limited liability insurance.
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3. Contractual Agreements: Make sure to review and negotiate your contract carefully, including items like payment, scope, and other details.

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Compliantly Hire Independent Contractors with Borderless

Not sure how to hire 1099 employees in the US? Borderless can help. With support you in compliantly hiring and paying independent contractors in the US and in 170+ countries around the world. Book a demo to find out how.