The gig economy is transforming the way businesses operate. And 1099 employees are at the heart of this shift.
These 1099 employees are independent contractors who work for a business. They’re different from traditional W-2 employees because they have more control over their work and pay their own taxes. And as a business owner, understanding the rules and benefits of working with them lets you tap into this powerful network and boost your workforce.
So, what are the rules for 1099 employees? Here’s a guide to what these staff need and how they differ from W-2 employees.
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What Is a 1099 Employee?
1099 employees work for your business but aren’t legally employees. Instead, they’re called independent contractors or freelancers. People often refer to them as 1099 employees because of the 1099 tax form, which is the form businesses use to report money paid to independent workers.
It’s important to note that the term “1099 employee” isn’t quite accurate. This is because 1099 workers aren’t actually employees. A 1099 employee’s rights include having more control over their work than regular W-2 employees. They often choose their own hours or work from home. They can also take on projects from different clients.
When you pay these workers, you don’t have to take away taxes and other deductions like you would for employees. You also don’t have to provide health insurance or overtime pay, unless those perks are in their contract. They have to pay their own independent contractor taxes. And these self-employment taxes, such as the Medicare tax and the Social Security tax, can add up.
Even with these differences, 1099 employees can be a major help for your workforce. They bring unique skills to the table and help you fill your current staff’s gaps. They can also be a more affordable option than hiring full-time employees.
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Is Your Worker an Independent Contractor? Employee Classification Rules
The IRS has rules to help you determine whether a worker is an independent contractor. There are three main factors to consider:
- Behavioral. Do you direct or manage how the worker performs their tasks?
- Financial. Do you influence the financial aspects of the worker’s job? This includes factors like the method of payment, covering expenses, and providing tools and materials.
- Type of Relationship. Is there an employment agreement or contract? Do you offer the worker benefits like health insurance or a pension plan? Is the work a crucial part of your company’s regular business?
If you answer “no” to most of these questions, the worker is probably an independent contractor. But no single factor can decide whether a worker is an independent contractor or a regular employee. You have to look at the whole picture and consider all the details of your work relationship.
What If You’re Wrong?
Sometimes businesses misclassify independent contractors as regular employees, or vice versa. Misclassifying employees can lead to serious problems, like back taxes and interest charges.
It can also result in legal issues if a worker feels they’ve been treated unfairly. For example, there are no set limits on how many hours a 1099 employee can work. But some regular employees are entitled to overtime pay for hours worked beyond a defined minimum. Misclassifying workers can deprive them of rights like this, potentially leading to disputes.
If you’re not sure how to classify a worker, it’s a good idea to talk to a tax professional or attorney. They can help you make the right decision and avoid costly mistakes.
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Hiring a 1099 Employee: Requirements
There are a few essential steps to take and forms for both parties to complete.
First, have them fill out a Form W-9. This form records the worker’s name, address, and taxpayer identification number (TIN) or social insurance number (SIN). You need this information to report their earnings to the IRS.
At the end of the year, if you paid a 1099 employee $600 or more, you need to file a Form 1099-NEC. This form tells the IRS the total amount you paid the worker. You also have to send a copy to the worker so they can accurately report their income on their tax return.
You may also need to check that the 1099 employee has mandatory licenses or certifications for the work they’ll be doing. For example, plumbers need a state-specific license. Verify any relevant documents before the work begins.
Finally, some states have their own rules about contracts, reporting, and other requirements. Check your state’s regulations so you can stay compliant.
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5 Best Practices for Working With 1099 Employees
Follow these best practices for a smooth and successful working relationship with your 1099 workers. These tips can also help you stay compliant and avoid mistakes during tax season.
1. Use a Written Contract
When you hire a 1099 employee, communicate your expectations for the work. This means clarifying deadlines, deliverables, and any specific instructions. This helps the worker understand what you need and what the guidelines are. It also serves as a reference point if any questions or issues come up.
2. Provide Information and Resources
Make sure your 1099 employees have all the information and resources they need to do the job well. The more you set them up for success, the better the results.
3. Respect Their Independence
Remember that 1099 employees are independent contractors, not employees. That means you can’t always control when, where, or how they do their work. Trust them to get the job done according to your agreement, and avoid micromanaging.
4. Keep Accurate Records
Keep detailed records of your payments to 1099 employees. Include the amount, date, and purpose of each payment. You need this information to fill out your 1099 forms at the end of the year.
5. Stay Compliant
Follow all relevant laws and regulations to avoid complications. This includes correctly classifying workers, paying them on time, and following any industry-specific rules. If you’re not sure about something, talk to a legal or tax professional.
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7 Items Every 1099 Worker Contract Should Include
A solid contract is a critical part of a successful working relationship with your 1099 employees. It sets clear expectations, protects both parties, and prevents misunderstandings.
Here are seven key items every great 1099 contract should include:
- Scope of Work. Clearly define the work you expect the contractor to do. Include specific tasks, milestones, and deliverables. This makes sure everyone is on the same page about goals and expectations.
- Deadlines and Timelines. Set clear deadlines for important milestones. This helps keep the project on track.
- Payment Terms. Specify how much you’ll pay the 1099 employee. This could be an hourly rate, a flat fee, or a per-project price. Also, outline when to make the payments. This might be by milestone or on a regular schedule.
- Ownership. Make sure the contract specifies who owns the rights to the work created. In most cases, the client owns the final product, but it’s smart to clarify this in writing to avoid disputes.
- Confidentiality. If the 1099 employee needs access to sensitive business information, the contract should control that access. Include a clause that explicitly prohibits or limits how the worker can share that information.
- Termination Conditions. Outline the circumstances under which either party can end the contract. These might include failure to meet deadlines or poor work quality. Specify any prior notice requirements or penalties for early termination.
- Dispute Resolution. Decide and explain how to handle disputes and disagreements. This might be through mediation or arbitration. It helps both parties avoid problems down the line.
Send Professional Invoices to Your Customers
Once you know how to hire and manage 1099 employees, it’s time to take care of the client side of the equation. That’s where Joist comes in.
Create and share invoices in just minutes with Joist’s easy-to-use mobile tool. Record payments, issue reminders, and track your monthly sales. You can easily manage everything from clients to projects in one place.