The aftermath of the COVID-19 pandemic has seen more and more people buy into the idea of freelancing and independent work. Flexible work hours, the absence of a boss, and less control over how and when jobs are performed are some perks of being an independent worker. 1099 employees otherwise known as independent contractors are freelancers who enjoy the freedom traditional employment does not allow.
The 1099 employee designation is an important one. The work structure and tax responsibility of a 1099 employee differ from that of a traditional W-2 employee. So many questions exist about the benefits and tax implications of being a 1099 employee. Read along to know everything about a 1099 employee to avoid misclassifying the 1099 designation.
- Who is a 1099 Employee?
- 1099 Employees Vs. W-2 Employees
- Contract for 1099 Employees
- What form do 1099 employees fill out?
- Non-employee compensation for 1099
- How much tax does a 1099 employee pay?
- 1099 employee rights
Who is a 1099 Employee?
The term 1099 employee originates from the 1099 tax form that employers have to fill out. A 1099 employee is otherwise known as an independent contractor. 1099 employees are professionals who offer their services to employers, companies, and business owners. A 1099 employee provides services based on demand, project, and within a finite time frame. Lawyers, accountants, contractors, and subcontractors who run their businesses and are not in a typical employer-employee relationship are examples of 1099 employees. Freelance writers, computer programs, and graphic designers fall under these 1099 employees.
1099 employees do not receive instructions and training on how he performs their job from an employer, nor do they follow a set schedule. Also, 1099 employees do not enjoy benefits like insurance, pension plan, vacation plan, and sick pay. 1099 workers are not subject to workers’ compensation and specific laws and may work for many clients simultaneously.
1099 Employees Vs. W-2 Employees
Figuring out who qualifies as a 1099 employee may be confusing. Yet the need to classify a 1099 employee correctly cannot be overemphasized. This is to avoid penalties and fines associated with misclassification. Here is how to decide if a worker is a 1099 employee or a traditional W-2 employee.
Degree of Control over how jobs get done
One significant difference between a 1099 employee and a traditional W-2 employee is the degree of control individual exercises over when and how he performs jobs. An employer has complete control over how, where, and the number of hours a W-2 employee puts into performing his job. This is different for 1099 employees or independent contractors.
A 1099 employee controls the manner, place, and number of hours put into performing jobs. He must, however, ensure the final result. An employer who contracts the services of 1099 employees only has control over the result of the job performed by independent contractors. And not in the manner in which they perform their job.
Thus, 1099 employees usually work on their schedule. And in most cases, they are experts competent in their field. Therefore, employers need not train or instruct them on how to perform their jobs. 1099 employees can work for multiple clients at the same time. In contrast, W-2 employees can only work for one employer at a time.
Another ambit of control that differentiates a 1099 employee from a W-2 employee is financial control. Does an employer control how and when the employee is paid? An employer pays W-2 employees on a schedule set according to the employer’s workplace policies. It may be on a monthly, bi-weekly, or weekly schedule. And he reimburses additional expenses W-2 employees incur while performing their job.
1099 employees control their payment schedule in agreement with their clients. In most cases, 1099 workers are paid per assignment or project. They set their rates and are responsible for expenses they incur while doing their job. Independent contractors are fully responsible for their taxes, unlike traditional W-2 employees. Typically, an employer withholds taxes on payments made to W-2 employees. In contrast, a 1099 employee handles his taxes.
It is essential to add that in carrying out their jobs, 1099 employees use their equipment, tools, and supplies. This is different for W-2 employees. Employers provide supplies and equipment needed by W-2 employees in carrying out their tasks. And will even reimburse W-2 employees for their expenses while carrying out their tasks.
Nature of relationship
The type of relationship is another factor used in differentiating a 1099 worker from a W-2 employee. Often the relationship between an employer and a W-2 employee is always ongoing. The relationship between a 1099 employee and a company is always for a finite period. It ends after the completion of a project, assignment, or task.
In addition, does the individual enjoy employee benefits from the company that retains his service? If not, then such an individual may qualify as an independent worker. 1099 workers do not enjoy benefits like insurance, pension plans, and every other employee-like benefit.
Contract for 1099 Employees
Contracts for 1099 employees defines the working agreement between a business and 1099 employees. Although 1099 employees are different from traditional W-2 employees, it is vital to have a written agreement between a 1099 employee and an employer. The agreement will spell out the expectation of both the 1099 employee and employer. This kind of agreement can be referred to as a Contract for 1099 agreement. A contract for a 1099 employee should include the period the working relationship will last and the compensation structure.
What form do 1099 employees fill out?
When a company contracts 1099 employees, the 1099 employees ought to fill out a W-9 tax form or form W-8BEN in the case of foreign contractors. The W-9 or W-8 BEN form, as the case may be, provides an employer with the 1099 employee social security number and tax information. With the information obtained from the W-9 form, a 1099 employee fills out a form 1099-NEC at the end of the year.
Employers must file a 1099-NEC form for every 1099 employee they pay $600 or more during the year. The form is filed with the Internal Revenue Service (IRS), and a copy is sent to the 1099 employee. Form 109-NEC serves as a notice to a 1099 employee that his earnings have been reported to the IRS. The 1099 employee uses the form 1099-NEC to file their taxes. Most times, 1099 employees may receive multiple 1099-NEC forms if they worked for more than one client during a tax year.
Non-employee compensation for 1099
Non-employee compensation on 1099 refers to the money paid to a 1099 employee as against a W-2 employee. 1099 employees have no automatic withholdings deducted from monies paid to them by an employer. Thus 1099 employees must pay taxes on the money they receive from clients. They must return it as self-employment income on tax returns. Form 1099-NEC reports non-employee compensation to the IRS and the business or individual that received the payment. Non–employee compensation is mandatory for workers who are not on a payroll of a business or individual.
How much tax does a 1099 employee pay?
Employers do not withhold taxes for 1099 employees like traditional employees. 1099 employees are solely responsible for their taxes. All 1099 employees pay self-employment taxes and income taxes.
1099 employees pay 15.3% self-employment tax. 12.4% of the self-employment tax goes to Social Security, while 2.9% goes to Medicare. The income tax obligation of a 1099 employee depends on the net business profit and losses, amongst other factors. A 1099 employee can file an income tax if the net earnings of such a worker are $400 or more. Where self-employment earnings were less than $400, a 1099 employee may still file an income tax return if he meets other filing requirements.
Quarterly taxes for 1099 employees are calculated by estimating their adjusted gross income, taxable income, taxes, deductions, and credits.
1099 employee rights
Although 1099 workers are not entitled to employee benefits like minimum wage, they have different rights. An independent contractor has the right to independence. They have the right to enjoy the freedom that being a traditional employee does not give. 1099 employees can work for multiple clients at a time, and they can even work for competing businesses.
In certain instances, a 1099 employee may have the property right to the work they produce. However, where a 1099 employee signs a written agreement stating that the production is a “work for hire,” the employer maintains the property right of the work. A 1099 employee has the right to legal redress if a client or employer violates the contract, which stipulates the client- 1099 employee relationship.
The term 1099 employee is misleading, as 1099 employees are not employees. 1099 employees are independent contractors and don’t enjoy the benefits a traditional employee enjoys. However, there are some perks to being an independent contractor. 1099 employees enjoy the benefit of working according to their schedule, price rate, and manner of performing tasks.
1099 employees are fully responsible for their taxes. For this reason, an employer must correctly classify a 1099 designation. An employer who misclassifies a 1099 employee may have to pay penalties and fines. Thus determining whether an employee is a W-2 employee or a 1099 employee is vital.
This article has discussed determining whether a worker is a W-2 employee or an independent contractor. It has also discussed the rights of 1099 employees and the taxes they pay. If you need help deciding if hiring a 1099 or W-2 employee is more appropriate, visit our LegaMart Lawyer directory and hire a lawyer to guide you through the process.