Who Is a 1099 Worker?

Michelle Wilson - September 2, 2023

In recent years, more individuals have transitioned from the standard 9-5 to an independent contractor role, primarily driven by the growth in remote work opportunities and persistent labor shortage. As a result, online data from Statista suggests that approximately 36% of the U.S. workforce now engage in gig work or independent contracting as of 2021.

Although workers don’t hold a typical employee status with the organizations they collaborate with, they operate with different taxation and legalities and come with a different name. Therefore, by definition, a 1099 worker is an independent contractor.

Definition and Basics

Diving into the background of the name, a 1099 employee, often called an independent contractor, gets its name from the IRS Form 1099, which is the form these workers use to report their earnings. Commonly, this category will include roles like freelancers, consultants, self-employed individuals, and sole proprietors, encompassing a diverse range of professionals such as self-employed tradespeople, accountants or marketing professionals or gig workers like Uber or Lyft drivers and Airbnb hosts.

Companies typically engage independent contractors for specific, often temporary, tasks or projects organizations must complete. While some projects may continue over a long period of time, the understanding is that once the project concludes, the organization will no longer retain the contractor as a regular employee.

Benefits and Challenges

Although there is no one-size-fits-all answer for becoming a 1099 worker, weighing the pros and cons of this type of work has helped many determine the best fit for them.

Benefits of Being a 1099 Worker

First, one of the main benefits of being a 1099 worker is its increased flexibility. In a survey conducted by Freelancing in America in 2021, online data showed that 74% of independent contractors shared that flexibility and control over their work were among the top reasons for choosing their employment status and rightfully so. 1099 workers can choose their hours, where they are working from, and how they want to tackle a task. They can set their schedules and have more control over their work-life balance, giving them greater independence than the traditional 9-5er.

Another significant benefit is the potential for higher income. Many 1099 workers can earn more than traditional employees in similar roles because they can negotiate their rates and simultaneously take on multiple clients or projects. This income potential can be particularly appealing for skilled professionals who can command competitive service rates. Additionally, 1099 workers often have the advantage of deducting certain business expenses, which can further increase their take-home pay.

Challenges of Being a 1099 Worker

Of course, no position is without challenges. Despite offering a potentially higher wage, taking on the role of a 1099 worker may also equate to a lack of job security. Therefore, rather than having the confidence of having the same paycheck every two weeks, a 1099 worker will have to continually seek out new clients or projects to ensure they are receiving enough income. This uncertainty can lead to financial stress and a constant need to hustle for work.

Another challenge is the absence of employee benefits. 1099 workers are typically responsible for their own healthcare, retirement savings plans, and other benefits that traditional employees often receive as part of their compensation package. These add-ons can be costly and require careful financial planning. Additionally, 1099 workers cannot access paid time off or paid holidays, so any time away from work means a loss of income. Balancing work and personal life can be challenging, as there may be pressure to work long hours to maintain a consistent income stream. Overall, the lack of benefits and job security can make the life of a 1099 worker financially and emotionally demanding.

Why Do Organizations Choose to Engage Independent Contractors?

As you weigh your decisions as a worker, it is worth noting that independent contractors hold a certain appeal to companies. For example, independent contractors often bring a high level of specialization to their respective fields, enabling organizations to leverage their expertise for specific projects and tasks on an “as-needed basis.” Additionally, contracting offers increased flexibility, allowing organizations to engage these professionals for short-term projects as their budget allows, without the long-term commitment of hiring traditional employees. Moreover, since contract workers operate independently and typically carry their insurance, organizations face reduced legal risk compared to directly employing individuals. These individuals may also undergo the same rigorous background check as a standard employee, verifying that they are competent in their job.

Another driving factor for organizations in hiring contractors is avoiding providing employee benefits such as health insurance or health reimbursement arrangements (HRAs) to contract workers. While this is not obligatory, some organizations offer benefits in the form of employee stipends to attract and retain 1099 employees without compromising their independent status, as stipends are considered taxable income.

Importance of Distinguishing Between Employee Types

It is important to understand whether a worker is a conventional employee or falls under the 1099 employee category, as it directly impacts a company’s payroll procedures. Traditional employees receive various benefits, such as health insurance and vacation time, and have the company they work for deduct their taxes from their paychecks. At the end of the fiscal year, you provide them with a W-2 tax form summarizing their earnings and the taxes withheld.

On the other hand, 1099 employees do not enjoy employee benefits or tax deductions from their income. Consequently, when the year concludes, you issue them a 1099-NEC tax form detailing their earnings as independent contractors, which they are responsible for reporting and paying taxes on. This distinction is vital for employers and workers, ensuring accurate tax compliance and the appropriate handling of financial matters.

How Does Payment Work for 1099 Employees?

So, what does this look like in practice? The answer will come down to key decisions, including how they will receive payment, the payment frequency, and the criteria for determining payment.

Three primary methods of compensating contractors are hourly rates, retainers, or project-based payments. Unlike an employee, contractors do not receive a set salary under the classification the IRS provides. Unfortunately, under the same set of rules they are not eligible for overtime pay, which is something a full-time employee is likely to receive. Since the government does not classify contractors as employees, employers are not required to withhold or file taxes on their behalf, nor are they responsible for payroll taxes, unemployment insurance, or business expenses.

Understanding the Difference

Experts cannot overstate the importance of correctly classifying a worker as an employee or a contractor since making the wrong determination can lead to significant financial repercussions. If the IRS finds that you’ve misclassified an employee as a contractor, you could be liable for taxes from past years, among other penalties which may be substantial if you are considering a period over several years. Therefore, it’s essential to exercise caution and diligence, even engaging an expert when making these classifications to avoid costly consequences.