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What Is a 1099 Contractor?

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What Is a 1099 Contractor?

A 1099 worker isn’t legally an employee of your company. Instead, they are considered a contractor or self-employed worker.

In certain situations, you might need a person to work for your company without hiring that individual as a full- or part-time employee. In that case, the person would be an independent contractor. Independent contractors receive a Form 1099 from your company. There are some benefits to working with contractors, but you must make sure your business follows all the rules.

Hiring a 1099 contractor

1099 contractors aren’t legally employees of your company. Instead, they are considered contractors or self-employed workers.

A 1099 contractor has certain freedoms that a standard employee doesn’t. Contractors technically own and operate their own business and decide when, where, and how they work. Usually, independent contractors work with companies on a project-by-project basis. For example, they might contract with a company for a project that lasts for a few months or a year. Once the project is over, contractors move on to another project with another company. If all goes well, the company might renew the contract or start a new contract for a different project with the same person.

In some situations, a 1099 contractor might work with a company on an ongoing basis. For instance, the contractor might agree to provide five hours of a particular service to the company every week, indefinitely. Even though the contract is ongoing, the contractor retains autonomy and is still considered an independent contractor and not an employee.

Companies often find it more cost-effective to work with contractors rather than hire employees for certain roles. For example, if content writing or graphic design isn’t a core part of what a company does, it can make more sense to outsource those tasks to an independent contractor. Going the 1099 route also gives companies more freedom. It’s often more cost-effective to part ways with a contractor whose work isn’t up to par than it is to terminate an employee.

Unlike W-2 employees, 1099 contractors don’t get paychecks. Instead, your company pays them much like it would any other vendor. How frequently you pay contractors depends on the terms of your agreement with them. They might invoice you monthly or expect weekly payments. Some might expect a partial payment or payment in full before they begin working on a project.

W-2 employee vs. 1099 contractor

Whether you are hiring people to work for your company in the U.S. or internationally, you need to make sure you classify them correctly. Each country has its own set of labor rules and regulations that describe workers’ rights and employer expectations. In some countries, employees are entitled to a certain number of paid days off each year. Companies are also usually responsible for withholding certain taxes from employees’ paychecks.

That’s one of the big differences between 1099 contractors and W-2 employees. Let’s take a closer look at how those differences break down.

Benefits

Benefits

1099 contractors are independent. Aside from the agreed-upon payment amount, they don’t typically receive any benefits from the companies they work with. At the end of a project or once the contract is up, they can move on. Companies do not have to give them paid time off or sick leave.

Employees usually expect paid time off and family or medical leave. In the U.S., employers aren’t always required to give employees paid time off and others might not qualify for it. Many other countries require that companies provide their employees with a certain number of paid days off annually.

The U.S. also doesn’t require employers to give employees paid leave for medical reasons or to care for a new child. But the Family and Medical Leave Act (FMLA) stipulates that eligible employees get up to 12 weeks per year of unpaid time off for certain medical issues or family care. In contrast, 1099 workers don’t qualify for the FMLA.

Taxes

Another major difference between 1099 contractors and W-2 employees is how they handle taxes. When a company hires an employee, it’s responsible for paying half of that person’s Social Security and Medicare taxes. The employee pays the other half, and the employer usually withholds the amount from the worker’s paycheck. An employer can also withhold state, local, and federal income taxes as needed.

1099 contractor taxes are different. A company that works with 1099 contractors pays the contractors the agreed-upon amount. The contractors are responsible for making their own tax payments. They need to pay the full amount — both employee and employer contributions — of Social Security and Medicare taxes. They also need to pay federal, local, and state taxes on their own. In the U.S., independent contractors usually need to pay estimated taxes quarterly.

When a company hires employees, the new hires fill out Form W-4, on which they claim exemptions or ask the company to withhold more taxes each pay period. At the end of the year, employees receive a Form W-2 from the employer, which lists their total earnings and the amount of tax withheld in each category.

The 1099 contractor form is a W-9, Request for Taxpayer Identification Number. The W-9 provides a company with the contractor’s tax number and mailing address. If contractors are subject to backup withholding, they need to state that on the Form W-9. Later, your company should provide the contractors with Form 1099, which lists payments they received from you as miscellaneous income.

What happens if you misclassify workers?

Companies occasionally misclassify employees as independent contractors, in some cases, due to ignorance of the law. For example, some people believe that if 1099 contractors sign a contract, they are automatically an independent contractor and not an employee. However, specific laws define who qualifies as an employee and who can be a contractor. If your company has a level of control over the person’s work or how and where he or she does it, the individual is more likely to be an employee and not a contractor.

Your company may have to pay penalties and fines if you misclassify a worker, and the misclassification is reported or discovered. You will need to pay your company’s share of the individual’s Social Security and Medicare taxes. You might also have to pay interest and penalty fees to the Internal Revenue Service (IRS).

1099 contractors vs. subcontractors

1099 contractors vs. subcontractors

1099 contractors may or may not be subcontractors, depending on their relationship with your company. Subcontractors, according to the IRS, receive Form 1099 from the companies they work with.

Often, a subcontractor is a person who is hired by another contractor. For instance, your company might hire a graphic designer for an upcoming advertising campaign. If the designer needs help with the project, the individual might hire a subcontractor to work on certain parts of it. The designer might pay the subcontractor from their own fee, or your company might agree to pay the subcontractor a separate fee.

Rights of a 1099 contractor

Independent contractors don’t get the perks that often come with being an employee, such as employer-sponsored healthcare coverage, paid time off, and a retirement plan match. They are also fully responsible for their taxes and often have to pay higher taxes than employees.

However, there are still perks to being a 1099 worker, which is why it appeals to so many. Independent contractors get to decide when and where they work. They often charge by the project, so if a project takes less time to complete than anticipated, they can start on something else and don’t have to worry about missing hourly wages.

Another benefit of being an independent contractor is that it doesn’t restrict a person to a single company. Contractors often work for multiple companies simultaneously. Some people enjoy the opportunity to juggle projects and switch back and forth between assignments as they go about their day.

While 1099 contractors don’t have access to employer-sponsored retirement or healthcare plans, they can set up their own plans. In the U.S., self-employed workers can save for retirement in an individual retirement account (IRA), a Self-Employed Pension Plan, or a SIMPLE IRA. Depending on how they have organized their business, they might be able to open a solo 401(k).

Contractors also have access to health insurance. They can purchase plans from their state’s marketplace or buy a private policy. Self-employed workers can deduct what they pay in health insurance premiums from their income when they file taxes.

1099 contractor requirements

1099 contractor requirements

How can your company know if it’s working with 1099 contractors or W-2 employees and avoid any possible misclassification? There are three areas to consider:

  • Relationship: Is the relationship between the worker and the company that of employee-employer or contractor-client? One way to look at that is whether workers provide a service that your company needs to survive. For example, a restaurant can’t function without servers, and a manufacturer can’t survive without people working in its factories. On the other hand, a restaurant doesn’t need a long-term graphic designer, and a manufacturer will get by without a permanent creative website copywriter.
  • Behavior: Does your company have a lot of say over how people do their work? Do you expect workers to clock in and out at certain times or to perform tasks following specific rules? If so, they are most likely employees. If the workers have more freedom over how they do the work, they are probably contractors.
  • Financial: Does your company provide workers with the tools and equipment they need to do the job? If they have expenses, who pays? If you pay for everything, workers are likely employees, not contractors.

What are the benefits of hiring a 1099 contractor?

In some circumstances, an independent contractor can be the right choice for your company. As long as you’re not misclassifying the worker, there are several benefits to using the services of a contractor. Those benefits include:

  • Increased flexibility: Hiring a contractor is like choosing a company to provide food service or housekeeping at your company’s offices. If the first option doesn’t work out, you can move on to the next. There isn’t as much flexibility when you hire an employee since you need to go through a long and expensive hiring and onboarding process every time you bring on a new hire. If a contractor doesn’t work out or isn’t a good fit for your company, you only need to work with them for the length of the contract.
  • More skills: When you work with contractors, you often get to work with individuals who have years of experience in their field and who have decided to work as consultants or advisors to companies. For instance, if you need financial guidance or help with strategic planning for your company, you can hire a virtual CFO to help your company develop a new strategic plan. If you were to hire an employee for the job, you might have to look for entry-level employees due to budget constraints.
  • Lower costs: It’s often much more cost-effective to hire contractors than employees. With employees, you need to spend money and time onboarding them, getting them acclimated to your company, and providing them with the needed equipment. Contractors often bring their own equipment. You also only have to pay a flat fee to a contractor, rather than benefits and perks like time off and health insurance.

Tax requirements for a 1099 contractor

Self-employed individuals or independent contractors are typically responsible for their own taxes. They have to pay quarterly estimated taxes and both halves of Social Security and Medicare taxes. With contractors, your company’s obligations are much lower. You might need to give them a Form 1099-NEC, or non-employee compensation, at the end of the year if you paid them more than USD 600. However, if you used a payment processor, such as a credit card or PayPal, to pay your 1099 workers, you don’t have to issue a Form 1099.

Are 1099 contractors the right fit for your company?

Hiring contractors can give your company more freedom and allow you to work with more experienced individuals to grow your global teams. But you must follow the labor rules and requirements of the country you’re hiring in to avoid misclassifying workers and potential for penalties. As an extension of Globalization Partners’ Global Growth Platform™, G-P Contractor enables companies to hire and pay contractors in 187 countries. Whether you’re hiring employees or contractors, we streamline the process with a single solution for your global workforce.

Manage your 1099 contractors with Globalization Partners

Globalization Partners’ AI-driven platform can help you with all your hiring needs. Hire, manage, and pay international contractors and employees directly in our platform. Contact us for more information or request a proposal.

 

Manage your 1099 contractors with Globalization Partners

 

THIS INFORMATION IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. You should always consult with and rely on your own legal and/or tax advisor(s). Globalization Partners does not provide legal or tax advice and the information is not tailored to the specific situations of your company or your workforce. Globalization Partners makes no representations or warranties concerning the accuracy, completeness or timeliness of this information. Globalization Partners shall have no liability arising out of, or in connection with, the information, including any loss caused by use of, or reliance on, the information.

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