1099 Employment
Summary Definition: An independent contractor who uses IRS Form 1099 to report their income from clients instead of being a hired employee who uses a W-2.
What is a 1099 Employee?
A 1099 employee is a commonly used, albeit misleading, term for an independent contractor stemming from the use of the Internal Revenue Service (IRS) 1099 form instead of a W-2 Form to report independent contractor wages, specifically Form 1099-NEC (a.k.a. the Independent Contractor Tax Form).
Independent contractors, such as freelancers, consultants, and gig workers, are not technically considered hired employees, so their payment and tax reporting requirements differ.
1099 vs. W-2 Employee
Unlike a salaried or hourly employee, a 1099 independent contractor is typically self-employed and responsible for managing their tax obligations, such as Social Security or Medicare taxes.
Furthermore, they often work under an independent contractor agreement instead of an employment contract, which defines the scope of their service and compensation terms.
However, this increased autonomy also comes with a few downsides. For example, unless specifically provided in their work agreement, a 1099 contractor isn’t entitled to the same benefits as hired employees, such as health insurance or an employer-sponsored retirement account.
1099 contractors also bear more financial risk as their income depends on client availability and demand rather than an annual or hourly salary.
Who Qualifies as an Independent Contractor vs Employee?
To determine whether a worker is a 1099 form independent contractor or a W-2 employee, the IRS considers three factors of the worker’s relationship with the employer. These “Common Law Rules” focus on the worker’s behavioral and financial control or independence and the working relationship's defined parameters.
Together, these rules assess how much direction and oversight the employer has over the contractor. No one factor or combination of factors is decisive, as the full scope of the working relationship must be considered. Employers who still can’t determine if a worker is an employee vs. independent contractor can use IRS Form SS-8 for more assistance.
| Common Law Rule | Rule Details |
| Behavioral | Evaluates how the business controls the worker’s tasks, assignments, and deadlines. |
| Financial | Evaluates who controls monetary and compensation matters, such as expense reimbursements, earned wages, and provided resources. |
| Relationship Type | Considers other nuances of the relationship, such as offered benefits (if any), length or permanence of the relationship, and whether the contractor’s services are a key activity of the organization’s business. |
Keep Up With Compliance
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