A “1099 employee” is not a recognized classification under U.S. labor law. Instead, the term “1099 employee” is often a misnomer that refers to individuals who are classified as independent contractors for tax purposes.
Independent contractors are self-employed individuals who provide services to businesses or clients. They are not considered employees, so they do not receive a W-2 form at the end of the year. Instead, they may receive a Form 1099-NEC (Nonemployee Compensation) or Form 1099-MISC, which reports their earnings to the IRS.
Differences between full-time employees and independent contractors
Full-time employees maintain a formal employment relationship with an employer. In contrast, independent contractors function as self-employed individuals or businesses within a contractual work arrangement.
When it comes to tax responsibilities, full-time employees have their income taxes, social security, and medicare taxes withheld by their employers. Independent contractors, on the other hand, shoulder the responsibility for paying their own income taxes, including self-employment taxes.
Full-time employees enjoy eligibility for a range of employer-provided benefits, including health insurance and retirement plans. In contrast, independent contractors don’t receive these traditional employee benefits from clients or businesses.
Regarding legal protections, full-time employees benefit from labor laws that grant them rights such as minimum wage and overtime pay. Independent Contractors have fewer legal protections under labor laws compared to employees.
Full-time employees often operate within the parameters of their employer’s control regarding work hours, tasks, and conditions, while independent contractors maintain a higher level of autonomy and control over their work methods and schedules.
Paid time off, such as vacation and sick leave, is typically offered to full-time employees as part of their compensation package. At the same time, independent contractors don’t have entitlement to employer-provided paid time off.
While employers may make contributions to retirement accounts or offer financial incentives for full-time employees, independent contractors typically handle their own business expenses, which may be deductible for tax purposes.
What are the common 1099 jobs?
Some common types of jobs where you might encounter Form 1099 income include freelance writing, consulting (in various fields, including management, finance, marketing, and IT), graphic design, photography, web development, digital marketing, real estate agents, contractors and construction workers, delivery and rideshare drivers (drivers for services like Uber or Lyft are considered independent contractors and receive income reported on Form 1099-NEC or 1099-K), fitness instructors, event planning, IT and tech services, healthcare professionals, musicians and performers, and online content creators (Youtubers) among others.
Why should you hire a 1099 employee?
Hiring a 1099 employee, or an independent contractor, can offer several advantages for employers. For example, this approach can save costs, as employers don’t have to provide independent contractors with employee benefits, such as health insurance, retirement contributions, or paid time off.
1099 employees are also great for short-term tasks or specialist roles, as hiring one doesn’t create a long-term employment relationship. Once the project or contract is completed, the business isn’t obligated to provide ongoing work or benefits.
Independent contractors are also easier to hire from abroad, as they can be located anywhere, allowing businesses to tap into a global pool of talent without the need for physical relocation or geographical constraints.
Paperwork for independent contractors
Hiring independent contractors in the United States involves specific paperwork and documentation to establish the working relationship, outline terms, and ensure compliance with tax and legal requirements. These are key documents you will have to fill out to work with the 1099 employee in the US.
Independent contractor agreement. It outlines the terms and conditions of the working relationship between the business and the independent contractor. The agreement should specify project details, compensation, payment terms, deadlines, and any other relevant terms. It often includes clauses addressing confidentiality, non-compete agreements, and intellectual property rights.
W-9 Form
In the United States, Form W-9, officially titled "Request for Taxpayer Identification Number and Certification," is used in specific tax situations. Namely, it's for businesses to get tax details from freelancers who are US citizens or tax residents, no matter where they are.
Purpose of Form W-9
Form W-9 is primarily used by individuals and entities, such as freelancers, independent contractors, and businesses, to provide their taxpayer identification number (TIN) to entities that will pay them income during the tax year. The TIN can be a Social Security number (SSN), Employer Identification Number (EIN), or Individual Taxpayer Identification Number (ITIN).
The details provided on the W-9 are then used by the paying entity to fill out other tax documents, like Form 1099-MISC, which reports non-employee compensation.
In simple words, US businesses don't withhold tax or give benefits to freelancers. But the IRS wants to track what freelancers earn. Businesses report payments over $600 to freelancers using Form 1099-NEC, and they use Form W-9 to get the freelancer's tax ID.
If a US business works with a freelancer who isn't a US citizen or tax resident, they use Form W-8BEN or W-8BEN-E.
When is Form W-9 used?
Usually, clients or financial institutions will ask for this form. It's not sent to the IRS. Instead, return it to the person who asked for it and keep a copy. Here is a wider list of situations when you should use Form W-9:
For independent contractors and freelancers. Businesses request a W-9 from non-employees they pay for services to ensure they have the necessary details to report the payments.
For interest, dividend, and broker transactions. Financial institutions might request a W-9 for certain transactions.
For debt cancellation. If a debt owed by an individual or business is canceled, the creditor may request a W-9 from the debtor.
For real estate transactions. In some real estate transactions, a W-9 might be requested to report payments and transactions to the IRS.
Where do you get Form W-9?
You can obtain Form W-9 directly from the U.S. Internal Revenue Service (IRS). The simplest way to obtain Form W-9 is to download it from the official IRS website. You can also visit a local IRS or federal government office to pick up various tax forms, including Form W-9. However, if a business or individual needs you to complete a Form W-9, they will often provide one for you.
When you have the form, you can fill it out manually, or if you've downloaded it from the IRS website, you may be able to fill it out electronically and then print and sign it. Always ensure you're using the latest form version, as the IRS can update it.
How do you fill in Form W-9?
Filling out Form W-9 is relatively straightforward, but it's essential to provide accurate information. Here's a step-by-step guide on how to fill out the form:
Name. Enter your full name as shown on your income tax return. If you operate a sole proprietorship and your business has a separate name (a "doing business as" name), you'll put that in the next line.
Business name. If you have a business name, trade name, DBA name, or disregarded entity name, you'll put it here. If not, just leave it blank.
Federal Tax Classification. Check the appropriate box for your tax classification (e.g., individual/sole proprietor, C Corporation, S Corporation, Partnership, Trust/estate, Limited Liability Company, etc.). If you're an LLC, you'll also need to specify the tax classification (C=C corporation, S=S corporation, P=Partnership).
Exemptions. If you are exempt from backup withholding and FATCA reporting, enter the appropriate codes in the boxes. Most individuals do not fill out this section unless they've received a specific notice from the IRS.
Address. Provide your address.
City, state, and ZIP. Fill in your city, state, and ZIP code.
List account number(s) here (optional). This is only used when the W-9 is provided in relation to a specific account, and the requester wants to associate the form with that account. You can usually leave this blank.
Part I – TIN (Taxpayer Identification Number). If you're an individual, this will be your Social Security Number (SSN). If you're operating with a business entity (like an LLC or a Corporation), it might be an Employer Identification Number (EIN).
Part II – Certification. Read the certification carefully. If everything is accurate, you'll sign and date the form. By signing, you're certifying, among other things, that the TIN you're providing is correct and that you're not subject to backup withholding (unless you've previously been notified by the IRS that you are).
Signature and Date. Sign your name and date the form.
Form W-9 is a critical tax form, and any false statements can result in penalties. It's crucial to ensure the information provided on the form is accurate and up-to-date.
Note: This summary is for information only. Always check the IRS website or consult a tax expert for guidance. . Before payment can be made to an independent contractor, the business requires the contractor to complete a Form W-9. The completed W-9 is used to report payments to the IRS.
Certificate of Insurance (COI). Depending on the nature of the work, businesses may request a Certificate of Insurance from the independent contractor. This document demonstrates that the contractor carries liability insurance, which can help protect both parties in case of accidents or damage during the project.
Invoice. Independent contractors provide invoices to bill clients for their services. Invoices typically include the contractor’s contact information, a description of the services rendered, the agreed-upon rate or fee, the total amount due, payment instructions, and payment terms.
Receipts and expense reports. These records may include receipts for materials, supplies, equipment, travel, and other expenses that may be deductible for tax purposes.
1099-MISC or 1099-NEC. If the independent contractor earns $600 or more in a tax year from a single client or business, the client is required to report these payments to the IRS using either a Form 1099-MISC (for miscellaneous income) or a Form 1099-NEC (for nonemployee compensation).
If this sounds too difficult for you or you want to hire an independent contractor from abroad (which means a bunch of other documents), consider getting help from MWDN. We will hire the best tech talent for you and take care of all the legal and tax paperwork.
