Behind every hire is a human being. That’s why a connected experience is key for both full-time employees and 1099 workers, or contractors, alike. To take on global expansion with confidence, there are specific 1099 worker rules that you need to be aware of to deliver a supportive experience for all.
For example, 1099 workers must be classified properly, work independently, and, ideally, have a written service agreement. Let’s explore how to hire independent contractors compliantly with a reliable Employer of Record (EOR) solution — and make employment opportunities accessible for everyone, everywhere.
What is a 1099 worker?
A 1099 worker is a U.S.-based contractor, freelancer, or other self-employed worker that handles specific projects. They are not direct employees of a company and are not paid a fixed salary or on employee payroll.
1099 worker examples can include a general contractor, consultant, freelancer, gig worker, remote developer, accountant, writer, or even a realtor. According to the IRS, an individual is an independent contractor if the payer directs only the result of the work. Independent contractors, not the employer, determine how and when the work is done. While they set their own working hours, independent contractors are subject to a self-employment payroll tax.
What are the benefits of 1099 workers?
1099 workers offer many benefits for companies looking to scale quickly. 1099 workers can handle specific projects without the long-term commitment of hiring full-time employees. You can have access to a broader talent pool, enter global markets, and rapidly scale your workforce compliantly. With the support of an EOR solution, you can hire and pay contractors anywhere with G-P Meridian Contractor™.
It’s beneficial for businesses to hire 1099 contractors to reduce costs. For example, companies don’t have to pay contractors overtime, statutory employment benefits, or vacation time. Employers also don’t typically provide health insurance for independent contractors, further reducing overhead costs.
Usually, independent contractors work with companies on a project-by-project basis, helping businesses rapidly complete specialized projects. For example, they might work on a project that lasts a few months or a year. Once the project is over, contractors move on to another project with another company. Or if all goes well, the company might engage the contractor for a different project.
1099 worker rules for employers
There are 1099 worker rules that businesses need to be aware of to maintain compliance. From local labor law compliance to filing requirements, here are some of the rules for 1099 workers that companies should keep in mind:
- Properly classify 1099 workers. The first 1099 rule for companies is to confirm that the individual in question is actually a 1099 worker. You cannot simply designate workers as 1099 contractors. They must clearly meet the state-mandated legal criteria to qualify as an independent contractor. Be sure to avoid misclassifying an employee as a business owner. Your company may have to pay penalties and fines if you misclassify a worker.
- Pay close attention to filing requirements. Once you’ve determined how to classify workers, it’s time to file the right paperwork. The 1099 contractor form is a W-9, which requests a Taxpayer Identification Number (TIN). 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 W-9. Companies also need to file a tax form 1099-NEC, or non-employee compensation, which lists payments the contractor received from the company as miscellaneous income. A 1099 form is used to report non-employment income to the Internal Revenue Service (IRS). If companies pay an independent contractor USD 600 or more in non-employment income, the business is required to issue a 1099 form.
- Stay on top of 1099 worker payments. Many businesses use a 1099 payroll platform to pay contractors quickly. With G-P, companies can make fast, accurate payments to contractors in any currency, via a digital wallet, ACH, bank transfer, wire transfer, or credit/debit card. Avoid paying contractors with peer-to-peer apps such as Paypal or Venmo unless you are using a business account and report payments to the IRS.
- Clarify tax requirements for a 1099 contractor. Self-employed individuals or independent contractors are typically responsible for withholding taxes. They must pay quarterly estimated taxes on both halves of Social Security and Medicare taxes.
What are common 1099 worker rights?
Independent contractors don’t get the perks that often come with being an employee. A 1099 worker isn’t entitled to employer-sponsored healthcare coverage, statutory employment benefits, paid time off, or a retirement plan. However, there are many perks to being a 1099 contractor.
The benefit of a 1099 contractor lies in flexibility. In general, 1099 workers have a few specific rights, including:
- Right to independent working conditions. Independent contractors get to decide when and where they work. 1099 workers should also use their own tools and equipment and can work from their own home or office space.
- Right to a written work agreement. While 1099 workers are not traditional W-2 employees, companies should still have a written services agreement in place. Make sure the agreement outlines the conditions of service and responsibilities of both the 1099 worker and the company.
- Right to independent business management. A contractor manages their own business and must pay their own taxes. Plus, 1099 contractors are not entitled to traditional employment benefits, such as paid vacation days or sick days.
- Right to work with multiple clients. Another benefit of being an independent contractor is that it doesn’t restrict a person to a single company. A contractor has the right to work with various clients at once. A contractor can market their services to any other business at any time.
- Right to independent retirement plans. 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).
- Right to health insurance. 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.
What are the rules for hiring independent contractors vs. W-2 employees?
When hiring 1099 contractors, companies need to ensure compliance with both local rules and classification requirements. How can companies know if a worker is a 1099 contractor or W-2 employee? The International Revenue Service (IRS) uses three key criteria to determine whether a U.S.-based worker is an employee or an independent contractor.
These factors, also known as common law rules, include:
- Behavioral control. Does the company control the work performed and how the worker does his or her job?
- Financial control. Are the business aspects of the worker’s job controlled by the payer? For example, consider whether expenses are reimbursed, how a worker is paid, and who provides relevant tools and supplies.
- Type of relationship. How do the worker and business perceive their working relationship to each other? Are there written contracts or employee benefits such as insurance, income tax withholding, or unemployment benefits? Is the work performed a key aspect of the business, and will the relationship continue?
Businesses must weigh all of these key factors to determine whether a worker is an employee or independent contractor. Keep in mind, there is no magic formula that “makes” a worker an independent contractor. Factors which are relevant in one situation may not be relevant in another.
1099 worker vs. W-2 employee: What’s the difference?
A W-2 employee, or a common-law employee, is a U.S.-based worker who is part of a traditional employer-employee dynamic. Unlike a 1099 worker who is an independent contractor with relative freedom, the employer controls how and where a W-2 employee completes their work. Some other key differences between a 1099 worker and a W-2 employee include:
| 1099 Worker | W-2 Employee |
| Works for one or more clients | Works for a single employer |
| Does not require formal onboarding or training | Requires onboarding and training |
| Is not entitled to employment benefits | Is entitled to employment benefits |
| Decides when and how they work | Employer decides when and how they work |
| Is paid upon project completion or specific milestones | Is paid an hourly or salary wage |
| Is responsible for withholding their own taxes | Employer withholds taxes on their behalf |
Hire and pay 1099 workers with G-P today.
Hiring 1099 workers is key for businesses looking to scale globally. With a reliable Employer of Record (EOR) like G-P, companies can plan, hire, and manage global teams with greater flexibility and complete confidence. As an extension of our industry-leading Global Growth Platform™, G-P Meridian Contractor™ enables you to hire and pay contractors in 180+ countries, quickly and easily. And with our built-in Wise payment technology, you can make fast, accurate payments to contractors in your choice of currency.
Are you ready to unlock the power of global teams? Explore the best way to work, and the best way to pay today.
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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). G-P does not provide legal or tax advice, and the information is not tailored to the specific situations of your company or your workforce. G-P makes no representations or warranties concerning the accuracy, completeness, or timeliness of this information. G-P 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.
