As more workers are attempting to achieve a better work/life balance, prioritizing flexibility in their work schedules, and moving away from the traditional workplace environment, businesses have greater access to using these individuals as independent contractors, or 1099 employees.
Enhanced communication portals and workplace mobilization has made it easier than ever for people to work remotely. Employers can realize a number of important benefits when using a 1099 employee instead of a traditional employee.
However, it is important to understand rules and restrictions regarding 1099 employee taxes, 1099 employee rules, and 1099 employee rights.
What Is a 1099 Employee?
A 1099 “employee” is not really an employee. He or she is actually an independent contractor or a freelancer.
The term “1099” refers to the type of tax form that a person with this working relationship receives from the various companies that hire him or her.
The independent contractor and company negotiate a rate for work and services, which is often part of short-term projects. The company then outsources these services to the independent contractor. The parties may enter into a written contract that outlines the terms of their agreement.
Benefits of Using a 1099 Employee
1099 employees can obtain a number of important benefits from this working relationship, including the ability to work on a more flexible basis, change work environments on a routine basis, run their own business and have greater freedom.
However, the benefits to employers are often extensive and worth taking notice of. Because the worker is not technically an employee, the employer can sidestep many of the costs associated with employees, such as:
- Medical insurance premiums
- Workers’ compensation insurance premiums
- Equipment
- Office space
- Tools
- Expensive training or development
- Benefits administration, including sick leave, annual leave or vacation time
- Unemployment insurance premiums
Additionally, businesses have the ability to scale up or down their business by using 1099 employees without having to worry about the issues associated with traditional employees, such as paying unemployment benefits.
Companies can use independent contractors to cover short-term projects without having to make an undesirable long-term commitment or enter into an extensive employment contract.
1099 Employee Rules
The Internal Revenue Service determines whether a person is considered a traditional employee or a 1099 employee by considering the degree of control the business exerts over the individual. This is analyzed by evaluating three categories:
- Type of relationship – This category considers the type of relationship between the business and the employee. It considers whether employee benefits are offered to the worker and whether there is a written contract between the parties. Additionally, it is considered whether the relationship is ongoing and whether the work is considered a key aspect of the business.
- Behavioral control – This factor considers whether the company has the ability to control the worker and how the worker performs his or her job.
- Financial control – Financial control has to with whether the business has the ability to control different monetary aspects or benefits of the workers’ job, such as the reimbursement of expenses or method of payment.
1099 Employee Taxes
Companies are not responsible for paying 1099 employee taxes.
They do not pay FICA, social security or unemployment taxes on the state or federal level. Instead, 1099 employees are taxed on the gross pay they receive from companies, minus expenses if they are considered sole proprietorships. They may also form LLCs, S corps, or other business entities and be taxed on that basis.
However, it is important that businesses properly classify workers as either independent contractors or employees. Not doing so can impose significant liability to a company.
If the Internal Revenue Service determines that a 1099 worker is actually a regular employee, the business may be liable for backdated withholdings to the country’s tax administration. This may include social security contributions and payments to other funds, such as a housing fund or pension. Foreign courts may impose additional penalties, including employee payments or fines.
Additionally, governmental agencies in the foreign country may determine that you should have a legally established entity in the country due to the employment relationship, which can result in additional fines or being barred from seeking this entity status after developing a negative relationship with local labor agencies.
Misclassified workers may also be eligible for additional payments because they may be entitled to minimum wage or overtime pay. They can sue the business to collect these unpaid amounts. Major global conglomerates have had to pay hundreds of millions of dollars in settlements after being sued for misclassifying employees.
1099 Employee Rights
Because 1099 workers do not have a traditional employment relationship with a business, they have different rights. They are not entitled to minimum wage or overtime pay. However, they also cannot be restricted in the same ways that employees can. For example, they generally work for several companies at the same time. They may not be prohibited from working for competing businesses.
Additionally, 1099 workers are entitled to their intellectual property. They usually own the copyright for their work while employees do not.
For example, a company may hire an independent contractor to take pictures for their website. The photographer may supply these pictures to the company. If an employee took the pictures, the pictures would become the employer’s property due to the “work made for hire” principle and employment relationship. However, an independent contractor would generally have the right to use this property on another client’s website.
Some companies attempt to get around this rule by stating in the independent contractor agreement that the business is purchasing the intellectual property rights; however, not all such provisions are valid.
In order for a work for hire clause to be valid with an independent contractor, three conditions must be met:
- The work is specially ordered or was commissioned
- Before beginning the project, the parties sign an agreement that states that the work is for hire
- The work falls under specific categories, such as being part of a collective work, a translation, a supplementary work or a contribution to an audiovisual work
Help with Hiring Independent Contractors
To ensure that they remain compliant with applicable labor laws and taxing authorities, many businesses choose to hire an international PEO when considering using independent contractors or when wishing to outsource their work.
Companies may be able to convert their existing independent contractors into compliant employees. Read more information about different employment options on the GlobalizationPedia site.
