What is a 1099 employee?

A 1099 employee refers to an independent contractor who receives a Form 1099 from a client or employer, rather than a W-2. Unlike traditional employees, 1099 workers are generally responsible for paying their own taxes and do not receive benefits such as healthcare or retirement contributions.

What is the difference between a 1099 employee and a W-2 employee?

A 1099 employee can also be called a freelancer, independent contractor, or contract worker. They’re self-employed workers who can operate as business owners (for example, by starting an LLC or corporation) or as sole proprietors. The main difference between 1099 workers and W-2 workers are in how they’re classified, how they’re taxed, and the benefits and protections they’re entitled to.

Employment classification:

• 1099 workers: Typically classified as independent contractors, 1099 workers operate on a contract basis and are not considered direct employees of the company they provide services to.
• W-2 employees: W-2 employees are directly employed by a company and are subject to the employer's control over their work tasks, schedule, and other employment conditions.

Tax treatment:

• 1099 workers: Independent contractors receive payment for their services without taxes withheld by the client or employer. They are responsible for paying their own income taxes, including self-employment tax.
• W-2 employees: Employers withhold federal and state income taxes, as well as Social Security and Medicare taxes, from a W-2 employee's paycheck. Employers also contribute a portion of these taxes on behalf of the employee.

Benefits and protections:

• 1099 workers: Typically do not receive benefits such as health insurance, retirement contributions, or paid time off. They also do not have the same protections as W-2 employees under labor laws.
• W-2 employees: May be eligible for benefits such as health insurance, retirement plans, paid vacation, sick leave, and other perks provided by the employer. They are entitled to various labor protections and rights mandated by law.

Common types of 1099 workers

The use of 1099 workers has been a common practice for several decades. However, this employment arrangement has become much more common in recent years, due in no small part to the rise of remote work and the gig economy (and increase in the number of gig workers) and higher demand for flexibility among workers and employers alike.

Industries where 1099 workers are common include (but are not limited to):

• Graphic design
• Writing
• Accounting and bookkeeping
• Customer service
• Software and web development
• Human resources

What are the classification rules for 1099 contractors?

When you hire 1099 workers, it’s absolutely vital that you classify them correctly—meaning you make sure you actually employ 1099 workers, and not employees who are being taxed as 1099 workers.

There are two main sets of classification rules for workers in the US.

IRS classification rules

The Internal Revenue Service (IRS) uses three primary factors to determine whether a worker is an employee or an independent contractor:

1. Behavioral control: Does the company control or have the right to control what the worker does and how the work is done?
2. Financial control: Are the business aspects of the worker's job controlled by the payer? This includes factors such as how the worker is paid, whether business expenses are reimbursed, and who provides tools and supplies.
3. Type of relationship: Are there written contracts or employee-type benefits (e.g., pension plan, insurance, vacation pay) provided? Will the relationship continue, and is the work performed a key aspect of the business?

Department of Labor classification rules

Effective March 11, 2024, the Department of Labor released new rules for independent contractor and employee classification under the Fair Labor Standards Act. The rules use six tests to analyze the working relationship between a contractor and their employer to determine whether an employee-employer relationship actually exists. The tests are:

1. Opportunity for profit or loss: Whether the worker is able to negotiate the price of services or goods and make business decisions that could result in either profit or loss for their business.
2. Investments by the worker and employer: Whether the worker is providing their own tools and equipment for the job.
3. Degree of permanence: 1099 work relationships shouldn’t be indefinite, while W-2 relationships can be.
4. Nature and degree of control: Whether the worker controls when and how they work; for example, setting their own schedule and working from home.
5. Whether the work is an integral part of the business: The DOL says 1099 workers shouldn’t perform work that’s central to a company’s core business function. If they do, they might be W-2 employees.
6. Skills and initiative: Whether the worker has special skills that employees within the company don’t possess.

Penalties for misclassifying 1099 workers

The government takes worker misclassification seriously. Misclassifying employees as independent contractors can lead to significant penalties, including:

• Back employment and taxes
• A $50 penalty per unfiled W-2
• A penalty of 3% of employee wages plus 40% of any unpaid FICA taxes
• A penalty of 0.5% of unpaid tax liability per month, up to 25% of the total tax liability

You could also be responsible for additional penalties for unpaid overtime, minimum wage violations, plus state and local government and tax penalties.

When to hire 1099 employees vs W-2 employees

The decision to hire 1099 or W-2 employees will depend on your needs for each project or situation. Here are some factors to consider:

• The nature of the work: Is it project-based or ongoing?
• The duration and scope: Is it short-term or indefinite?
• Your budget: 1099 workers can be great for small businesses that need help but can’t quite afford a full-time employee.

1099 employee frequently asked questions

Can 1099 employees work full time?

1099 workers are not full-time employees. Technically, they can work what would be considered “full-time” hours (35 or more per week). However, 1099 workers can (and often do) work for more than one employer, which often hinders their ability to work full-time hours for any one client.

How many hours can 1099 employees work?

1099 workers typically have flexible schedules and can work as many hours as agreed upon in their contract. However, they are not entitled to overtime pay under federal law.

Do 1099 employees get benefits?

Generally, 1099 workers do not receive employee benefits such as health insurance, retirement contributions, or paid time off from the client or employer. They also aren’t entitled to minimum wage. Whether they are required to have workers’ compensation coverage varies by state.

How many 1099 employees can one company hire?

There is no limit to the number of 1099 employees a company can hire, as long as they meet the criteria for independent contractor status.

What paperwork do you need for a 1099 employee?

Employers should have a written contract outlining the terms of the engagement, including scope of work, payment terms, and other relevant details. When you start working with a contractor, have them fill out a Form W-9, so you have their social security number or taxpayer identification number and all other necessary information for tax filing purposes.

Additionally, you must issue a Form 1099-NEC (the tax form that replaced Form 1099-MISC for reporting taxable, non-employee compensation to the IRS in 2020) to the worker and file it with the IRS each tax year.

What taxes do you pay for a 1099 employee?

1099 employees are responsible for paying most of their own taxes, including federal income tax and Social Security and Medicare taxes. 

Employers aren’t required to make tax payments for 1099 workers, including tax withholding, payroll taxes, and unemployment taxes.

How do you pay 1099 employees?

Employers typically pay 1099 workers based on the terms outlined in their contract, whether it's hourly, per project, or another agreed-upon payment structure. Contractors aren’t typically a part of a company’s payroll, since they aren’t subject to the same withholdings as employees. Instead, they often submit invoices and are paid via accounts payable.

But with Rippling, you can pay employees and contractors, all over the world, in a single unified pay run, with paperless W-2, 1099, new hire filings, and more.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.