A 1099 employee is basically someone who works on their own terms, like an independent contractor, freelancer, or consultant. They’re not regular employees, so they don’t get benefits like paid time off, or unemployment benefits.
Instead, they’re in charge of managing their own taxes, including Social Security and Medicare. This article explains how it works and what to know if you’re considering this path.
Understanding the 1099 Relationship
So, we’ve mentioned this “1099” number before, what’s the story?
Well, it comes from IRS Form 1099-NEC (Nonemployee Compensation). This is the form businesses use to report payments they make to someone who isn’t a regular, on-payroll employee.
It’s essentially a record of payments for services. You might see older references to Form 1099-MISC, which handled this before 2020, but now it’s all about the 1099-NEC.
Now, there are also a few terms thrown around: “independent contractor,” “freelancer,” and “consultant.” Are they all that different?
For the most part, no.
They generally describe someone who works for themselves and gets hired by other businesses for specific projects or tasks. Sometimes, you might hear “consultant” used for someone with more specialized expertise, but when it comes to taxes, they’re all usually treated as 1099 workers.
This is what separates a 1099 worker from a regular employee (who gets a W-2).
⦿ 1099 Workers: Setting Your Own Course
With a 1099 setup, the company hiring you says what needs to get done. But you decide how it gets done. You set your own hours, use your own tools, and manage your own workflow.
You’re in charge of how you execute the work.
⦿ W-2 Employees: Following a Set Path
A W-2 employee, on the other hand, is told both what to do and how to do it. They have set schedules, use company resources, and usually work under supervision.
The company directs their workflow.
Key Differences Between 1099 and W-2 Employees
The table below shows the main differences between 1099 and W-2 employees.
Main Characteristics of 1099 Work
We’ve just briefly touched on the basics of 1099 work, but let’s take a closer look at what it entails.
⦿ Being Your Own Boss
One of the best things about 1099 work is the freedom.
You’re pretty much your own boss when it comes to how you work. This means you set your own hours (you still have to meet deadlines, of course), you choose where you work (home, a cafe), and you decide how to do each project.
This freedom is a big plus for many 1099 workers.
⦿ Doing Your Own Taxes
This is a very important part of 1099 work.
Because you’re not a regular employee, taxes aren’t taken out of your pay automatically. So, you have to pay your own self-employment taxes. These taxes cover Social Security and Medicare.
You’ll probably also need to make tax payments to the IRS every three months to avoid problems later. It’s important to keep good records of your income and what you spend on work stuff so you can file your taxes correctly.
Maybe even save some money.
⦿Benefits? Not From Your Client
Here’s another big difference between 1099 work and regular jobs.
When you’re a 1099 worker, the companies you work for usually don’t give you benefits like health insurance, paid time off for vacations or sick days, or help with retirement savings.
You have to get these things yourself.
This is something important to think about if you’re considering 1099 work.
⦿ Saving Money on Work Costs
Even though doing your own taxes takes work, there’s one good thing: you can save money on things you spend for work.
This could be things like part of your rent if you work from home, money you spend on software, travel costs for work, and other things.
These savings can help you pay less in taxes overall.
Advantages of Being a 1099 Employee
So, what are the upsides of working as a 1099er? Here are some of the best things:
⦿ You Make Your Own Schedule:
This is a big one for a lot of people.
You get to decide when you work, which can be great if you have other commitments, like family or other projects. You can work early mornings, late nights, or whenever it suits you best.
⦿ You Can Make More Money:
Because you set your own rates, you have the potential to earn more than you might in a regular job. It depends on how much you work and how much you charge, but the opportunity is there.
⦿ You Get to Choose Your Projects:
You’re not stuck doing work you don’t enjoy.
You can pick and choose the projects that interest you, which can make your work much more fulfilling.
⦿ You Learn a Lot of Different Skills:
Working with different clients and on different projects means you’re constantly learning new things and growing your skills. This can be great for your career in the long run.
Disadvantages of Being a 1099 Employee
Of course, there are some downsides to 1099 work, too. Here are some things to keep in mind:
⦿ Money Can Be Unpredictable:
Unlike a regular paycheck, your income as a 1099 worker can vary. Some months might be great, and others might be slower. This means you need to be good at budgeting and saving money.
⦿ Finding Work Is Your Job:
You’re responsible for finding your own clients and projects. This means you need to be good at networking and marketing yourself.
⦿ It Can Be Lonely:
Working independently can sometimes be isolating. You don’t have the same daily interaction with coworkers as you would in a traditional office setting.
⦿ You Have to Handle Everything Yourself:
From sending invoices to tracking expenses, you’re responsible for all the business side of things. This can take time away from doing the actual work.
Are You a 1099 or a W-2? How to Tell
This is a really important question, both for people who are hiring workers and for people doing the work.
So, how do you know if someone should be classified as a 1099 worker or a W-2 employee? The main thing the IRS looks at is control.
It boils down to these three main categories:
⦿ Behavioral Control:
This is about who controls how the work is done.
Does the company tell the worker when, where, and how to do their job? Do they provide training or instructions? If the answer is mostly “yes,” it points towards a W-2 relationship.
If the worker has a lot of freedom in how they do their work, it leans towards 1099.
⦿ Financial Control:
This looks at who controls the business side of things.
Does the worker have significant unreimbursed expenses? Do they invest in their own equipment? Can they work for other companies at the same time? If the worker has more financial control, it suggests a 1099 relationship.
If the company handles most of the financial aspects, it points to W-2.
⦿ Relationship of the Parties:
This is about how the worker and the company see their connection.
Is there a written contract? Are there employee benefits (like insurance or retirement plans)? Is the relationship expected to be ongoing or just for a specific project?
A long-term relationship with benefits suggests W-2, while a short-term project-based relationship points to 1099.
Why This Matters
It’s super important to get this right.
If a company incorrectly classifies a worker as a 1099 contractor when they should be a W-2 employee, they can face serious penalties from the IRS. And for workers, being misclassified can mean missing out on important benefits and having unexpected tax burdens.
A Quick Example:
Let’s say a bakery hires someone to decorate cakes.
If the bakery tells the decorator exactly how to decorate each cake, provides all the supplies, sets their work schedule, and pays them a regular wage, it’s likely a W-2 relationship.
But if the bakery simply hires a cake decorator to create a specific cake for a one-time event, letting the decorator use their own tools and creative freedom, it’s probably a 1099 arrangement.
Handling the 1099 Paperwork (and a Helpful Tip!)
So, we’ve covered a lot about what it means to be a 1099 worker. But there’s one more important piece: the paperwork. Specifically, we’re talking about the 1099-NEC and the W-9.
➡ The 1099-NEC: Reporting Payments to Contractors
As we mentioned earlier, the 1099-NEC is the form businesses use to report how much they’ve paid to independent contractors.
If you’re hiring 1099 workers, you must send them a 1099-NEC by January 31st of the following year.
This form tells the IRS how much you paid the contractor and helps them track income.
➡The W-9: Getting the Necessary Information
Before you can even send out a 1099-NEC, you need to get some information from the contractor. That’s the work of W-9.
This form asks the contractor for their name, address, Taxpayer Identification Number (TIN), and other important details needed to accurately fill out the 1099-NEC.
It’s important to have a completed W-9 on file before you pay a contractor.
PaystubHero Making 1099s Easier
Handling 1099s can be a bit tricky, especially if you work with several contractors. But it doesn’t have to be!
PaystubHero makes it simple to create 1099-NEC forms instantly. Just fill in the names and details, and you can send them straight to your contractors.
Our platform is a huge time-saver, especially during tax season.
FAQs
We’ve answered commonly asked questions on a 1099 employee.
