What is a 1099 Employee? Employer’s Guide
Hiring the right talent is critical for any business. In some cases, traditional employees on payroll are the best fit. But for flexibility and specialised skills, you might turn to a 1099 employee. But what exactly is a 1099 employee, and what rules do they follow?
In this article we guide you through everything you need to know about 1099 workers. By the end, you’ll understand how to properly classify and manage these workers while staying compliant.
As of 2025, there are approximately 30.6 million independent contractors in the United States. This growing workforce plays a crucial role in various industries, offering businesses a flexible way to access skilled labour.
Table of Contents
What is a 1099 Employee?
(Other terms include: independent contractor or gig worker)
A 1099 employee is a self-employed individual hired to complete specific tasks or projects. Instead of being paid through traditional payroll, the worker is paid without withholding for taxes, benefits, or other deductions.
Key Characteristics of a 1099 Employee:
- Self-Employed: They operate as their own business and may work for multiple clients.
- Project-Based Work: Often hired for a specific job with a defined scope and timeline.
- No Tax Withholding: Contractors are responsible for managing and paying their own taxes, including Social Security and Medicare taxes.
Flexibility: They determine how and when they complete their work.
1099 Employee vs. W-2 Employee
When hiring, it’s essential to understand the differences between 1099 independent contractors and W-2 employees. Each classification comes with its own set of rules and responsibilities for both employers and workers.
Feature | 1099 Employee | W-2 Employee |
Employment Status | Self-employed | Part-time or full-time employee within the company |
Tax Withholding | Responsible for own taxes and declaring income within the tax year | Taxes withheld by employer |
Benefits | Not provided | Employer may offer employee benefits health insurance, PTO, etc. |
Work Schedule | Sets their own schedule | Employer sets hours and tasks |
Control | Decides how work is completed | Employer controls how tasks are performed |
Tools and Equipment | Provides their own | Supplied by employer |
Understanding these differences helps ensure compliance and avoid misclassification issues.
What Are the Rules for 1099 Employees?
To ensure compliance, it’s essential to understand the rules governing 1099 workers. Misclassification can result in fines, penalties, and legal complications.
Here’s what you need to know:
1. Classification Rules
The IRS uses a set of guidelines to determine whether a worker is an independent contractor or an employee. These guidelines fall into three main categories:
- Behavioral Control: Does the employer control how, when, or where the work is done? If yes, the worker is likely an employee.
- Financial Control: Does the worker have a significant investment in their tools or workspace? Are they free to seek other work and manage their own profit or loss?
- Working Relationship of the Parties: Is there a written agreement stating the worker’s independent status? Are benefits like health insurance or paid leave provided? Independent contractors do not typically receive these perks.
2. Payment and Taxes
- Form 1099-NEC: Employers must issue this tax form to any contractor paid $600 or more in a calendar year.
- No Withholding: Employers do not deduct taxes from contractor payments. Independent contractors are responsible for paying self-employment taxes.
3. Benefits and Protections
Unlike employees, 1099 workers do not receive benefits such as:
- Paid time off
- Health insurance
- Workers’ compensation
- Unemployment benefits
4. Work Agreements
While not legally required, having a written contract is highly recommended. This agreement should outline:
- Scope of work
- Payment terms
- Deadlines
- Confidentiality clauses
- Termination policies
Advantages of Hiring 1099 Employees
Independent contractors can be a great fit for certain roles or projects. Here’s why many businesses choose this route:
- Cost Savings: No need to pay payroll taxes, benefits, or overtime pay.
- Flexibility: Hire contractors for short-term projects without long-term commitments.
- Expertise: Access highly skilled professionals for specialised tasks.
- Reduced Overhead: Contractors often provide their own tools and equipment.
Common Roles for 1099 Employees
Independent contractors can be found in almost every industry. Here are some of the most common roles:
- Freelance writers and graphic designers
- IT consultants
- Construction subcontractors
- Event planners
- Real estate agents
- Personal trainers
- Tree service professionals
Pro Tip: Use tools like Invoice Fly’s Tree Service Software to manage projects and payments efficiently.
5 Best Practices for Working With 1099 Employees
Working with independent contractors offers flexibility and expertise. However, it requires a thoughtful approach to ensure a smooth and compliant relationship.
Consider these top tips when hiring 1099 employees:
1. Define the Scope Clearly
Set clear expectations from the start. Define the project’s scope, deliverables, timeline, and payment terms in a written agreement. This protects both parties and prevents misunderstandings down the line.
2. Respect Their Independence
Independent contractors are not employees, so avoid micromanaging. Let them decide how to complete their tasks as long as they meet the agreed-upon deadlines and standards.
3. Use Technology to Stay Organized
Keep track of payments, project milestones, and communication using software designed for efficiency. Tools like Invoice Fly’s Tree Service Software help manage estimates, invoices, and time tracking effortlessly.
4. Ensure Compliance
Always verify a contractor’s tax status by collecting a completed Form W-9 before they start work. Ensure you issue a 1099-NEC form for anyone earning $600 or more in a calendar year. Staying compliant with IRS guidelines protects your business from audits and fines.
5. Build a Professional Relationship
Even though contractors are not employees, fostering a respectful and professional relationship ensures better collaboration. A positive experience can encourage them to work with you on future projects.
Challenges of Hiring 1099 Employees
While there are many benefits, hiring independent contractors also comes with challenges:
- Compliance Risks: Misclassifying workers can lead to fines and audits.
- Less Control: Contractors set their own schedules and methods, which may not always align with your preferences.
- Turnover: Since they aren’t tied to your business long-term, contractors may move on to other clients quickly.
What Are the Rules for Employers?
If you’re hiring 1099 workers, here are the key responsibilities you need to meet:
- Issue a 1099-NEC Form: Provide this form to any contractor paid $600 or more in a year.
- Verify Work Status: Use IRS Form W-9 to collect the contractor’s taxpayer identification number (TIN).
- Keep Records: Maintain detailed records of contracts, payments, and correspondence.
- Avoid Micromanaging: Independent contractors must have the freedom to decide how they complete their work.
Simplify Managing 1099 Employees
Hiring 1099 employees offers businesses flexibility and access to specialised skills. But it also comes with responsibilities and risks.
Managing contractors can get complicated, but the right tools can make it easier. Invoice Fly helps you:
- Create detailed project estimates
- Track time and payments
- Generate invoices quickly
- Keep records organized
Whether you’re hiring a single contractor or building a team, make sure you’re equipped with the knowledge and resources to succeed.
1099 Employees FAQs:
No, independent contractors are not entitled to benefits like health insurance or workers’ compensation. However, misclassification could lead to legal challenges.
Contractors are typically paid per project, hourly, or based on milestones. Payments are made without tax deductions.
The IRS may impose penalties, back taxes, and interest for misclassifying employees as independent contractors. In some cases, businesses may also face lawsuits.
While not required, a written agreement protects both parties. A contract clearly defines the scope of work, payment terms, and expectations.
Yes, independent contractors can set up retirement plans like SEP-IRAs or Solo 401(k)s. These options allow them to save for retirement while enjoying potential tax advantages.
Yes, contractors can deduct eligible business expenses like equipment, travel, and office supplies. Keeping accurate records using tools like our Reporting Software makes this process easier.
