What is a 1099 employee? They are self-employed workers, also called independent contractors. The Form 1099 reports the income independent contractors receive throughout the year to the IRS for tax purposes. This form replaces the need for a W-2 and indicates that they are not an employee, no employer is responsible for paying FICA taxes or withholding income tax, and the independent contractor is responsible for paying Self-Employment Taxes.
Here Are Some Examples of a 1099 Employee:
- Childcare Workers
- Real Estate Agents
Professionals who offer their services to the public are generally classified as independent contractors and require a 1099 form. However, it’s not always that easy to classify.
“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” – IRS.gov, Independent Contractor Defined
When it comes to independent contractors, employers are not expected to withhold income taxes, pay FICA taxes, and in some cases, pay any premiums for workers’ comp or unemployment insurance. This can make the arrangement seem simpler and more attractive than having a W-2 employee.
Should you hire independent contractors? Of course! If that’s what best defines your relationship with the employee and makes the most sense for the job that needs done. Just be careful. Generally, your workers will not qualify as 1099 employees and will be classified as regular employees in the eyes of the IRS and the state. Misclassifications put your business at high risk for multiple penalties, fines, and back-taxes.
If you wish to hire independent contractors, these are the guidelines the IRS uses to determine employee classification types.
FLSA 6 Prong Test:
- Extent of work performed by the independent contractor.
- Workers managerial skills affect his/her opportunity for profit or loss of the company.
- Does the worker invest in facilities/equipment?
- What is the worker’s skill and initiative?
- Permanency of the relationship. (i.e. Do you work with them every day?)
- Nature and degree of control by the employer.
IRS 3 Prong Test (Darden Factors):
- Behavioral control of the organization over that independent contractor.
- Financial control over them (providing tools, uniforms, vehicle).
- Relationship of the parties.
A 1099 employee is an independent contractor and there may be some benefits that make it look like a good option, but we want to caution employers to cross their t’s and dot their i’s. Misclassification hurts! Don’t forget to check out our full ebook on 1099 vs. W-2s below, especially if you’re considering hiring a 1099 employee.