There’s no such thing as a 1099 employee. Either someone’s using the wrong term, or the employer could be in big trouble and owe the employee and the IRS.
In this post:
- Where the term 1099 employee comes from
- Employees versus independent contractors
- What employers should be doing to do things the right way
- What workers should do if they’re employees, independent contractors, or misclassified as 1099 employees
What is a 1099 Employee?
When someone says 1099 employee, they really mean independent contractor.
Independent contractors get tax form 1099-NEC or 1099-K. Employees get tax form W-2.
So you can kind of see where the confusion comes in and people who don’t know the technical terminology can mix things up. A better term to use in place of 1099 employee is 1099 worker (or stick with independent contractor).
Getting the terms right is important because there are huge tax and legal differences between employees and independent contractors.
As the employer, you want to make sure you’re classifying your workers correctly to avoid big fines for not withholding payroll taxes or labor law violations. As the worker, you’re probably getting cheated if you’re getting treated as an employee when you should be an independent contractor.
What’s the difference between an employee and an independent contractor?
The key differences between an employee and an independent contractor are:
- Employers withhold taxes for employees not independent contractors. Independent contractors have to pay the IRS separately.
- Employers pay one-half of Social Security and Medicare taxes for employees. Independent contractors pay the full taxes through self-employment taxes.
- Independent contractors can’t receive employee benefits like health insurance or participate in the employer’s 401(k) plan.
- Other labor law rights such as unemployment, worker’s compensation, overtime pay, and required breaks often don’t apply to independent contractors.
But employers can’t just decide the call workers independent contractors to make things easier for them or to save money. The IRS follows three main rules to determine who is an employee and who is an independent contractor.
From IRS Independent Contractor (Self-Employed) or Employee?
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
That’s a direct quote, and if you dig deeper, you’ll see the rules can get a lot more specific. There are also a lot of court cases and IRS rulings on specific types of work.
You should also know that the rules can vary for federal taxes, state taxes, federal labor laws, state labor laws, and workers’ compensation. There are some situations where a worker can be an employee under one rule and an independent contractor under another.
But the good news is that there’s usually a clear answer. I would guess in 90 to 99% of situations, you can ask a dozen CPAs or employment attorneys and get the same answer.
Usually the only debate comes from people who are trying to cheat or didn’t know better because they didn’t ask an experienced lawyer or accountant. The penalties and liability as the employer, or what you’re losing as the employee, if you get this wrong can start in the five or six-figure range.
So especially if you’re the employer, get professional help to get this right.
Special Rules for Special Jobs
In addition to the usual rules, there are also rules for special types of jobs. These rules usually say, that no matter what the usual rules are or how the employer and worker are doing things, this job is always an employee or always an independent contractor.
Common examples include nannies and truck drivers.
Can a minor be a 1099 employee?
It’s an uphill battle to call minors independent contractors. The reason is that it’s hard to say they have specialized knowledge, skills, and experience.
Minors also require a lot more supervision and management. That type of control points to an employee.
I’ll also point out that many states apply their child labor laws to independent contractors, while the federal child labor laws only apply to employees.
Child labor laws have come up in the last decade or so in things like summer camps and youth sports leagues. In short, they were flying under the radar when they were operating as mostly volunteer-run, community activities, but once they started acting like businesses and maybe not treating their young workers so well, they started to get more attention.
So if you’re hiring minors, don’t make any assumptions based on what you think you know. The fines are big and there’s possible jail time. Talk to a CPA. Talk to an employment lawyer.
Common Questions, Answers That May Be Unexpected
This set of questions usually comes up with people who don’t fully understand the difference between an independent contractor. If you’re here, don’t feel bad, because you’re doing right by trying to learn, and now you’ll know more about the right questions to ask.
What qualifies as a 1099 employee?
See that IRS quote and those links about employees vs. independent contractors above.
There’s no magic way to make someone count as an independent contractor. It depends on the job the worker is doing and his or her relationship with the employer.
How many hours can a 1099 employee work?
There are generally no rules where working up to X hours makes you an independent contractor and working more than X hours makes you an employee.
Working full-time for a single employer, especially long-term, can be a factor that points towards being an employee. Part-time workers can also be employees based on the nature of the work they’re doing and the employer’s level of control even if they only work a few hours per month or a couple of shifts ever.
What paperwork do I need for a 1099 employee?
In terms of how to hire a 1099 employee, it’s pretty easy. You need
- To collect an IRS Form W-9 with the independent contractor’s tax information.
- Some states with income taxes have their own version of a W-9.
- A handful of states require you to report that you hired an independent contractor. This is to make sure you’re classifying workers correctly and the independent contractor is paying taxes and not fraudulently collecting unemployment.
- A contract or independent contractor agreement.*
*An independent contractor does not mean the worker is legally an independent contractor. You generally can’t sign a contract that overrides the law. This includes the rules that determine whether the worker is really an employee.
Can a 1099 employee collect unemployment?
Independent contractors generally can’t qualify for unemployment benefits. There were some special rules that allowed 1099 workers to collect unemployment during the COVID-19 pandemic.
Unemployment is what gets a lot of employers in trouble for hiring “1099 employees.” 1099 workers can file for benefits saying that they qualify because they really should have been classified as employees. The state’s labor department will then make a decision that could result in fines for the employer if the worker is correct.
How do you pay a 1099 employee?
You can pay independent contractors cash, check, direct deposit, or however you agree in your contract. It’s possible and normal to pay by the hour, day, flat rate, or piece completed.
While you normally don’t withhold taxes, you may be required to do backup withholding if the contractor hasn’t provided you a W-9 so you can issue a 1099.
You should always collect a W-9 before the contractor starts work. Unless stated in your contract, you generally can’t withhold pay if the contractor hasn’t provided tax forms, but you will have a paperwork mess with the IRS.
Do This Instead
Here are a few common situations where employers want to hire workers as 1099 employees and the right way to handle them.
If you need a temporary employee, even just for a few hours on one day, that’s usually not a valid reason to treat the worker as an independent contractor. Remember, there are no minimum hours to be an employee instead of a contractor.
If you don’t want to deal with hiring paperwork, you might want to use a staffing agency. You sign with and pay the agency. The agency handles the worker’s taxes.
In addition to trying to save paperwork, employers often worry about paying probationary employees unemployment if they don’t work out. However, it’s generally not OK to have someone do a job for X days and then turn him into an employee doing the same job.
If you’re worried about unemployment or other employment protections, some states do allow probationary periods. The worker will still be an employee tax-wise, but the job offer will state the position has a probationary period.
Talk to your employment lawyer about how you can structure the job and what paperwork you need.
Saving Taxes and Paperwork
By now, you probably know that it’s not OK to classify a worker as a 1099 contractor so you don’t have to worry about taxes or other paperwork. If not, you may want to scroll back to the top, read a few more posts, or talk to your accountant.
Help, My Employer Misclassified Me as a 1099 Employee
If your employer misclassified you as an independent contractor, there are a few actions you can take:
- File Form SS-8 with the IRS to get a tax determination of your employee vs. independent contractor status. This form is not anonymous, and your employer will know who filed it.
- File a complaint with your state’s department of labor, unemployment office, or worker’s compensation office.
- Talk to an employment lawyer about filing a lawsuit for any benefits or overtime pay you should have received.
I’m an Independent Contractor, What Now?
If you’re an independent contractor, you’ll have a few more responsibilities in terms of taxes. In addition to more paperwork in April, you’ll also need to track your expenses during the year and make estimated tax payments.
Check out Independent Contractor Tax Guide or tax guides for specific independent contractor jobs.
Does a 1099 employee need an LLC?
I’ve found that most people think LLCs do more than they actually do. LLCs generally don’t help with taxes, and buying insurance may be a cheaper option to get the legal protection you need.
However, LLCs can be a useful tool in some cases, so I’m not telling you not to look into forming an LLC. Talk to your tax and legal advisors to find out about the benefits an LLC may have for your situation.
Can a 1099 employee have a 401(k)?
Independent contractors actually have a lot of good options for opening their own self-employed retirement plan. This includes solo 401(k)s.