- Discover how to classify your 1099 workers
- See your responsibilities for 1099 employees and federal taxes
- See what paperwork you need to thrive with 1099 workers
Many business owners use 1099 employees for a wide range of jobs and tasks — such as helping with marketing content or managing the account books during the tax season — and your business can benefit from them, as well.
As with any hire, though, it’s important to make sure you file the right paperwork and come to a mutually beneficial agreement between the contractor and your business. If you’re interested in hiring a 1099 worker, this article will walk you through the key paperwork you need to use.
A 1099 employee is better classified as a freelancer or independent contractor. They don’t work for you directly. Instead, they’re considered self-employed and are hired to complete specific tasks or jobs — often in the short term. Unlike W-2 employees, you don’t have to worry about employee benefits like workers’ compensation, income tax withholdings, Medicare and Social Security tax withholdings, or things like overtime pay when compensating contractors.
You also don’t have to worry about paying a particular wage or salary. Instead, payment is based on what the two of you agree to at the start of the project. Some freelancers will charge by the hour, while others will give you a project rate. The contractor will then give you an invoice at the end of the project or an agreed period of time, and you’ll pay it without worrying about payroll taxes.
Many businesses appreciate the flexibility that comes with bringing in expert freelancers to work with them on specific projects. However, it’s important to understand federal and state laws regarding who’s considered a part- or full-time employee and who’s considered a contractor. Misclassification can cause significant problems for businesses.
The biggest difference between these types of workers lies in their degree of control. The employee works for you, so you have more control over how they do their work and when. An independent contractor works for themselves and can have multiple clients and more flexibility with their schedule. The Wage and Hour Division of the U.S. Department of Labor will investigate any business entity and their workers if they have reason to suspect a worker has been misclassified as a contractor instead of an employee.
Now that you have a better idea of employee status, let’s walk through the documents involved with onboarding freelancers.
Employees appreciate 1099 workers because of the flexibility they offer. For example, you might have particular times of the year when you need several workers to fill a particular role, while other parts of the year can be slow. For these high-paced periods, independent contractors can help close the gap.
Since they aren’t employees, you don’t have to worry about making an unnecessary, permanent hire. Instead, you can hire an expert to help you with the surge and then end the relationship when the time comes. For example, a project manager contractor might help organize an annual conference or an accounting freelancer might help get you organized at the end of the year.
Freelancers also allow businesses to tap into their expertise. Unlike regular employees who likely take care of a variety of tasks related to their department, independent contractors often focus on specific areas, gaining niche experience and nurturing their skills.
Some of the best types of projects to use 1099 workers for include:
However, your business might elect to use independent contractors for nearly any type of project.
Bringing a new contractor on board does require you to carefully monitor certain paperwork. These forms help ensure the job runs smoothly and that you have your legal bases covered when tax time arrives.
Here are a few of the most important pieces of paperwork to have prepared and ready for your new worker.
Form W-9 is also referred to as a Request for Taxpayer Identification Number and Certification. When you hire a traditional employee, they have to fill out Form W-4. Form W-9 can be likened to Form W-4, but it’s designed for contractors.
When a 1099 worker fills out this form, they supply you with their taxpayer information, such as their Social Security number. You’ll need this information when you let the Internal Revenue Service (IRS) know about payments you made to the independent vendor. However, the form itself doesn’t need to be submitted to the IRS. Instead, you’ll keep it with your records and use the information it contains to fill out other forms regarding your contractor when tax time comes.
The 1099-NEC form (Nonemployee Compensation) is used to declare any payments you made to independent contractors. You don’t use this form to report any of the compensation you paid to your regular employees. The form can be filled out electronically or mailed to the IRS. Just make sure you file by January 31st each year.
This form replaces Form 1099-MISC, which was used until the 2020 tax year. Keep in mind that you still need to use 1099-MISC if you need to report any other type of miscellaneous payments that were made for reasons other than independent contractors.
As you fill out the form, you’ll actually have two copies of the 1099-NEC. The first copy, Copy A, needs to be sent to the IRS so they can see who you paid and how much. The second copy, Copy B, goes to the contractor. This can help them with their own tax filing. It also ensures that you’re in agreement regarding the amount of compensation you paid this contractor.
To fill out this form, you’ll need to have your business’s taxpayer identification number (TIN), the total compensation, and the information about the worker you received from their W-9.
The written contract should outline the job or project the 1099 employee will complete for you and what terms will manage this task. This contractor agreement details the scope of the project and the applicable timeline. It should also note the billing rate, procedures, and what the process will be if you want something edited or adjusted on the project. Your contract should also make it clear that you own the intellectual property produced. Depending on the project, you may also need the 1099 worker to sign a nondisclosure agreement.
Including this type of information in the contract will make sure that everyone is in full agreement about the task at hand. It provides everyone with the chance to ask any relevant questions and clarify any points.
A contract like this also offers protections to both small business owners like you and the contractor. It can provide you with assurances that the contractor understands exactly what they are responsible for so you know what to expect as the final project. It also assures the contractor that you have given them a clear statement of work and won’t make adjustments without paying accordingly.
Since your 1099 worker is not an employee, you won’t pay them according to the payroll as you would with traditional employees. Instead, the self-employed contractor will submit an invoice to you based on the work completed according to the terms laid out in the contract. You will then submit payment to them according to the process outlined in your contract.
Keep in mind that since this worker isn’t an employee, you don’t have to worry about withholding employment taxes — including Medicare taxes and Social Security — from their paychecks. Setting aside money for self-employment taxes and other relevant payments, such as unemployment insurance, falls to the freelancer themselves.
However, for every 1099 worker to whom you pay at least $600, you’ll need to submit an accurate accounting of your payments at tax time. You’ll need to fill out a copy of the IRS form 1099-NEC and declare how much you paid to this given vendor. So, you’ll want to keep careful books for each payment you make. Keeping and filing a copy of the invoices you receive throughout the year will provide the documentation you need when tax season arrives.