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How to Hire 1099 Workers

Companies sometimes need to hire outside talent, and sometimes it doesn’t make sense to add a regular employee to the payroll. The greater flexibility and specialization independent contractors can bring to your projects make them potentially valuable partners for many different types of work. Independent contractors are a large and growing share of the labor market in the United States, so knowing how to hire a 1099 employee for all sorts of tasks can streamline your operations and reduce the cost of projects big and small.

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What is a 1099 employee?

Before you hire a 1099 worker, it helps to know what this type of work is and how it differs from regular employees on the company payroll. The term 1099 refers to the tax filing status of an independent contractor. This represents roughly 1 out of every 3 workers in the modern economy.

Workers who perform some kind of service for your company without being added to the payroll are classified differently by the IRS than regular employees. This is an important distinction because independent contractors don’t generally have taxes and other payroll expenses withheld from their pay, and they usually don’t earn seniority, vacation time or other benefits regular employees get.

State and federal regulators are careful about the distinction between regular and 1099 employees. Misclassification of a regular employee as an independent contractor can result in unfair treatment of the employee and stiff penalties for the company that does it.

The degree of complexity and overlap in the jobs people do can make it hard to come up with an absolute distinction between regular and independent workers, but most state and federal regulators have a few rules of thumb for determining what a worker’s classification should be. As a rule, 1099 workers:

  • Do not get paid hourly wages but are more likely to get paid per project or in negotiated increments
  • Do not work under close supervision but perform work more similar to a partner company
  • Maintain control over their working hours, the conditions of their work and how they manage their time, such as when to take breaks and how long to work in a day
  • Work with more than one client, unlike regular employees who typically have just one employer
  • Do not receive overtime pay, health benefits, vacation time, seniority, retirement pensions or other noncash benefits of employment
  • May carry a professional license or certificate, such as a trades professional or licensed attorney

When making a determination about whether a worker is an employee or a 1099 independent contractor, no single factor decides where the worker fits. Rather, most regulators consider all of these factors and decide where the balance lies on a case-by-case basis.

You may, for instance, have a professionally certified accountant who works from home, manages their own schedule and is classed as an employee, while an IT engineer who works in your office and has to maintain specific working hours could still be a 1099 contractor. If you’re in doubt about how to hire 1099 employees without adding them to the payroll, check with an employment law attorney in your area who can advise you.

How to hire a 1099 employee

Hiring a 1099 worker is a somewhat different process from adding regular employees to the payroll. Regular employees are required to fill out forms W-4 and I-9 at the time of hire. These are the standard tax status and immigration status forms, respectively. Independent contractors, however, must submit an alternate set of forms, and the requirements for them to legally work for your company are different.

Independent contractor forms to collect

The first form to collect from your independent contractor is the W-9 (Request for Taxpayer Identification Number). The W-9 acts as a combined tax filing status verification and statement of legal right to work in the United States. This form doesn’t have to be submitted to the IRS, but your company does have to keep it on file for four years. Contractors filling out this form are asked to verify their name and address and indicate their company structure so you can file the appropriate form at tax time.

It’s generally a good idea to sign a written contract with your 1099 workers. Unless the work you’re hiring them for is very short-term and casual or is very clearly not a regular employment job, a service contract can help clarify that the worker is not being added to the regular payroll. The contract verifies that they’re an independent worker being brought in for a project or a series of projects.

Ideally, your contract should specify each party’s responsibilities, how the work will be performed and paid for and how much (or how little) direct supervision the worker will have. The contract should also include terms for dissolving the work relationship, terms for dispute resolution and sanctions for breach of contract. Always consult with a licensed attorney before drafting a contract to make sure it can be upheld by a court.

In addition to the regulatory forms and employment contracts you should gather, it’s helpful to have your 1099 worker submit regular invoices to get paid. This does several things for your company. First, submitting invoices for payment helps make a distinction between 1099 work performed by an independent contractor and payroll work done by regular employees. Second, regular invoicing helps your payroll keep up to date and ensures that payments go out on time. Invoices also help with tax filing since they act as a paper trail of money your company has paid over the tax year and may help you prove expenses you’ve claimed on your company tax filings.

Forms to file during tax season

For most companies, tax season begins in January. It’s generally a good idea to get your company’s tax filings in early or, at least, to not wait until April and risk late filing penalties. If you have paid your 1099 worker more than $600 over the tax year, you likely have to file a reporting form with the IRS. This is the 1099 itself, but there are different versions of the form that match different types of contract work. It’s important to file the right version of the 1099 to avoid penalties and fees for late or improper filing.

If your 1099 contractor is organized as a regular LLC, limited partnership or sole proprietor and you paid them via check or direct deposit to a bank account, you can probably file IRS Form 1099-NEC to report their wages. If you paid your contractor via credit card or a payment processor such as PayPal, you might have to file Form 1099-K.

Both of these forms must be submitted to the IRS, and a copy has to be sent to the address your contractor gave on the W-9 you have on file. S-type companies are taxed in the same way individuals are, so these contractors often just file their own taxes using Form 1099-MISC, which you do not need to provide. Ask a tax professional for advice if you have any questions about which form is appropriate to use.

Record-keeping for a 1099 independent contractor

Good record-keeping is vital for successfully hiring and working with 1099 employees. It’s helpful to organize your records to keep all of the relevant forms in one easily accessed, but secure, location. If you keep paper records, set aside a file folder for each 1099 worker you hire, no matter how brief or casual the work may have been. Into this file, put your service contract (if you have one), a copy of the W-9, copies of any 1099 forms you have filed and any and all invoices the contractor submitted to your company. If you store files digitally, make sure high-quality PDF versions of these forms are properly saved to the folder and keep a backup copy someplace safe just in case.

Tools you can use to keep track of your payroll

Several apps can help you streamline the record-keeping requirements when you hire independent contractors. Quicken, Square and other payroll and accounting apps have options for contractor invoicing and automatic payments, as well as various tax-filing options and cloud-storage features. Many of these apps can be used online or off, and some even allow your contractors to directly input their hours and project milestones or other benchmarks for payment and work completed.

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