What is a 1099 Employee? An Essential Guide

Uncover everything you need to know about being or employing a 1099 worker

Whether you are a 1099 independent contractor, or delegate business functions to a 1099 employee, this article is for you. The entire 1099 employee concept opens up so many questions. In this article we’ll answer common questions like what a 1099 employee is, and what some of the pros and cons of being or hiring are. Let’s get into it! 

Gig workers, freelancers, independent contractors – you’ve heard these terms. These are individuals that provide services to one or more businesses on a contractual basis and file taxes as self-employed. 1099 employee is just another way of describing task-based or contractual workers. In this article, I will get into the nitty-gritty details of hiring a 1099 employee for your business. 

As a small business owner, you are swamped with a million things to do. From sales to customer support, you are taking care of a plethora of business functions. It is only natural to offload some of these tasks to someone else, but you may not have the means to hire someone on a full-time or part-time basis. This is when you consider getting a 1099 employee or two. Also, if you are a gig worker or are considering freelance as an option to make an income instead of full-time employment, you need to read this. 

As a small business, you might want to outsource bookkeeping to another individual or agency that provides this service. You only get billed for the hours they spend instead of having to fork out additional costs that come with having a full-time or part-time employee. Plenty of small businesses enter contracts with marketing agencies or consultants to help get more leads and sell more. Or you may consider paying a nano influencer to promote a sale or event at your business. There are individuals and businesses that provide seasonal services like pool maintenance, snow removal, landscaping, etc. When you employe them for these services, they become a 1099 employee for you. 

Check out this article on hiring a consultant for your small business. 

Similarly, if you want to make money by providing a service, you become a self-employed individual and will need to file taxes as such. Food delivery services like DoorDash or ride sharing platforms like Lyft depend on gig workers. When you sign up to drive for these companies, you become a 1099 independent contractor. You must file taxes on your own and bear the responsibility for reporting any income to the IRS. 

What is a 1099 employee?

In simple terms, a 1099 employee is someone that is paid for a service, and whose contract ends once the service is completed. A 1099 worker files taxes as self-employed and uses the 1099 tax form, hence the name.

On the other hand, full-time or part-time employees that are on a company’s payroll file taxes using a W2 form. As a business, you might have a few or many people working for you. If these individuals are on your payroll and make an hourly wage or a salary, they are W2 employees. Typically, having W2 employees at your business means having to offer benefits such as health insurance and PTO. Take a look at these employee benefits for recruitment and retention of your W2 workers.

What are the differences between a W2 and a 1099 worker?

There are a few stark differences between someone that is employed full-time or part-time with an employer and someone that is a 1099 worker and it goes beyond filing taxes using a different form. Let’s take a look at these differences:

Depending on your needs and budget as a business, you’ll need to make the call on what type of employees you need for specific roles and tasks. Keep reading to find out more on hiring a 1099 independent contractor for your business.

If you are a 1099 independent contractor, or are considering gig work, it is essential to know what you’re getting into and how being a freelancer differs from being an hourly or salaried employee. Jump down to the section about being paid to keep learning.

It’s pros and cons time!

When at crossroads, always make a pros and cons list. This is one piece of advice I will always swear by. Come take a look at the yays and nays of hiring a 1099 worker:

Now that you have a side-by-side analysis of the pros and cons of hiring a 1099 worker, you will find it easier to decide whether this is what your business needs and could potentially benefit from. Regardless of which type you choose, I would suggest taking a look at this hiring guide to pick the best candidates.

Is it better to be paid 1099 or W-2 as a worker?

As a person, there is no clear-cut answer here. It largely depends on what you want from a job. Some people depend on the stability and predictability of working as a W2 employee. They like knowing that they will be paid a set amount on a certain date. They like the fact that their employer does tax withholding on their behalf. In addition to these, they also enjoy benefits like health insurance, PTO, sick time etc. However, they usually don’t have the option to work flexible schedules or make their own schedule. They are either employed part-time or full-time and can’t choose how many hours they want to work. Their earning potential is capped. Unless they have the option to earn bonuses and commissions in addition to their base pay, there isn’t a whole lot of room for making more money.  

A 1099 worker can work flexible hours, choose their own schedule, work as much or as little as they want, and have the potential to make more money. The tradeoff though, is they still have to pay taxes on their income.  

A 1099 independent contractor must be able to work independently with minimal direction while W2 workers usually have more structure and guidance at work. W2 workers typically need to report to a supervisor or someone higher up in the chain of command while a 1099 worker is their own boss. 

Wondering what happens if you are a 1099 employee? Well, there are a few scenarios that might occur. You might:

• Thrive from working flexible schedules with minimal supervision.
• Enjoy the sense of independence and the ability to pick and choose gigs.
• Love the prospect of uncapped earning potential and work as much as you choose to or take a step back when you need a break.

On the other hand, you may experience burnout from working too much. It is also possible that you miss the stability of a guaranteed paycheck. As a 1099 employee, you are immune to layoffs, but it isn’t uncommon for oversaturation in the market and having to fight tooth-and-nail for lucrative gigs.

What is the downside of being a 1099 employee?

It is normal to want to know what the downsides (if any) of being a 1099 employee are. It all boils down to your perspective and unique set of circumstances. Being a 1099 worker means your income is not always predictable, unlike W2 employees that get paid a set amount every pay cycle. You are responsible to report income and pay taxes after receiving the money. In addition, you are usually not eligible to receive benefits like PTO or health insurance. For some people, these are not deterrents because the positives outweigh the unfavorable elements. You know your situation best and must pick accordingly.

1099 workers responsible for their pay

Along with making sure you file and pay taxes, as a gig worker you’re also held accountable for collecting your payment. Cash and checks suffice at times. However, accepting credit card payments can enhance your professionalism and make transactions more convenient for your clients.

Got 1099 problems, but a boss ain’t one? 

As cliched as it sounds, if you are a small business owner, you have the weight of the world on your shoulders, but the upside is that you work for yourself, and you don’t have a boss. Similarly, a 1099 independent contractor is a self-employed individual with more flexibility than a regular employee. When you employ a 1099 worker, it is important to be upfront about your expectations before signing the contract. It is just as vital for a 1099 worker to have realistic expectations when venturing out into the world of freelancing. 

For a small business, hiring a 1099 independent contractor could be a very smart move considering the upsides to the arrangement. At the same time, it is vital to be aware of the downsides. You don’t want to spend a lot of money and not get the desired outcome. I would recommend vetting potential hires by checking out their previous work or simply making a note of their online ratings.

The bottom line is, do your research. Always!

PS: I want your business to thrive and one way to maximize profits is by cutting down on processing fees. A reliable payment processor is definitely a game-changer! Give our no-contract payment processing a try!