Complete Payroll Solutions Logo

Who is a 1099 Worker?

by John Stebbins on Mar 9, 2020 3:35:33 PM

If you’re considering using freelancers, you may be wondering just who is a 1099 worker. As a result of the rise of the gig economy – according to the DOL, one in ten workers today is an independent contractor – it’s a good idea to familiarize yourself with the term. That way, you’ll be in compliance if you opt to outsource some functions.

1099 Worker Defined

A 1099 worker is one that is not considered an “employee.” Rather, this type of worker is usually referred to as a freelancer, independent contractor or other self-employed worker that completes particular jobs or assignments.

Since they’re not deemed employees, you don’t pay them wages or a salary. Instead, you pay the 1099 worker according to the agreement you strike with them. In addition, you don’t have to worry about withholding income taxes, withholding and paying Social Security and Medicare taxes, or paying unemployment taxes.

Moreover, another difference arises at tax time. Instead of providing a W-2 for traditional employees to report pay, you issue a 1099-MISC to independent contractors to whom you paid more than $600 over the course of the year. They, in turn, pay their own self-employment taxes. So you have the right information for filing, be sure to have the contractor complete Form W-9 when you engage them.

Classification Rules for 1099 Workers

The distinction between employee and 1099 worker is essential to compliance. To properly categorize workers, the IRS has provided classification rules as guidance. Above all, the biggest factor is control.

Specifically, according to the IRS, the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, and not what will be done and how it will be done.

For instance, to decide whether a worker is an independent contractor or employee, an employer needs to look at the facts of each unique case and consider:

  • Behavioral Control: Does the worker have freedom or is the business directing and controlling the work performed?
  • Financial Control: Does the worker use their own tools and incur their own expense or is the business directing or controlling the financial aspects of a worker’s job?
  • Relationship of the Parties: Does the worker get benefits? Is there an expectation the relationship will continue indefinitely? Are the worker’s services a key aspect of the company’s regular business?
Penalties for Misclassification

If you get classification wrong, and call an individual an independent contractor who is actually an employee, you could be liable for back employment taxes as well as substantial penalties plus interest. These fines can be particularly devastating to smaller businesses since they can add up. However, the good news is that there may be an out. The Voluntary Classification Settlement Program allows businesses who were treating workers as independent contractors to reclassify them and pay less.

Need Help?

Meanwhile, if you can’t decide whether a worker is an employee or independent contractor, the IRS can help. Simply file Form SS-8. The IRS will review the facts and circumstances and make a determination on the worker’s status.  

In short, with the hiring of 1099 workers outpacing regular employees, now’s a good time to get the distinction right. For more assistance, contact Complete Payroll Solutions at 401-332-9325.


Enter your email address to subscribe to this blog and receive notifications of new posts by email.

HR Cast