Key Takeaways
Summary | |
Definition | A “1099 employee” is a misnomer and actually refers to an independent contractor, not a W-2 employee. |
Key Differences | Independent contractors control how they work, can serve multiple clients, receive no employee benefits, and pay their own taxes. |
Hiring Process | Hiring a contractor involves sourcing talent, setting terms in a contract, and collecting required tax forms. |
Required Forms | Businesses must collect Form W-9 and file Form 1099-NEC for contractors paid $600 or more during the year. |
Purpose | Helps businesses correctly classify, hire, and pay independent contractors while staying compliant with IRS rules. |
While you may have heard the term “1099 employee,” it’s a misnomer. The term 1099 employee doesn’t refer to an actual W-2 employee, but to an independent contractor who uses the 1099 form as a self-employed worker.
1099 contractors—who can be small business owners, freelancers, gig workers, or consultants—often add just the extra burst of talent and speed you’re looking for. You might need to hire an independent contractor to assist with a short-term project, take on ongoing work you don’t have the time or skill set for, or fill critical gaps in your workforce.
Like employees, independent contractors come with a small pile of paperwork. Keep reading to learn more about the difference between contractors and W-2 employees, and get step-by-step guidance on hiring 1099 employees.
What is the difference between a 1099 employee and a W-2 employee?
A 1099 employee, or independent contractor, is a self-employed person who does specific tasks or projects for your business, usually on a short-term or occasional basis. A W-2 employee, on the other hand, isn’t self-employed—they’re employed by your business and work on a regular, usually full-time basis.
Regardless of whether you hire 1099 or W-2 workers, it’s crucial to classify them correctly. Misclassifying employees can have financial and legal ramifications (think: penalties and potential lawsuits).
Employees and independent contractors don’t just have different work responsibilities—they also have different benefits and tax obligations. Here are some key differences between 1099 workers and W-2 employees:
Contractors usually have full control over how, when, and where they work; W-2 employees are subject to your business’s behavioral control rules about how, when, and where they work
Contractors can work for multiple companies, sometimes simultaneously; W-2 employees work for a single employer
Contractors are paid hourly, by project, or with a flat fee; W-2 employees receive an hourly wage or salary
Contractors don’t receive company benefits; most W-2 employees are entitled to benefits like paid time off and health insurance
Contractors pay their own taxes and aren’t subject to withholdings; W-2 employees are subject to deductions like Social Security tax and Medicare tax
How to hire a 1099 employee
Hiring a 1099 employee may seem daunting, but the process is usually quicker and more straightforward than hiring a full-time employee. You don’t have to spend hours reviewing employee applications or scheduling and conducting multiple interviews. When you hire an independent contractor, you usually exchange a few emails, set up an intake call to learn more about their expertise and process, and then discuss next steps.
Below, we’re breaking down the process, including the most important part: getting your paperwork in order.
Step 1: Find the right contractor
You can search for independent contractors using traditional recruiting methods, like posting on job boards or scouring freelance platforms like Upwork and Fiverr for talent. However, a more active approach might work better; many experienced contractors rely on word-of-mouth and direct outreach—not just job ads—to find work.
Ask former colleagues for contractor referrals, reach out to professional networking groups or industry associations, message promising contractors directly on LinkedIn, or post in niche social media groups.
Once you find someone qualified and interested, set up a call to learn more about their work process and expertise. After you discuss project details, timelines, and payment terms, it’s a good idea to draw up a formal agreement before you get started. Some contractors provide a Statement of Work for you to sign, which lists their agreed-upon work responsibilities and fees, while others will look to your business to create a contract.
Step 2: Get your tax forms in order
You’ll probably need two documents when tax time rolls around: a W-9 and Form 1099-NEC. We’ve included links to the appropriate documents below, but you should also mosey on over to the Internal Revenue Service’s (IRS) website to make sure you have the latest versions.
Step 3: Ask your independent contractor to fill out Form W-9
When tax time rolls around, Form W-9 will be your best friend. (Note: A W-2 form is for traditional employees, not contractors, though if you’ve hired a staffing agency for your contingent workforce, it may have short-term workers fill out Form W-2.) You don’t need to send the W-9 anywhere, but you are required to keep it on file for a minimum of four years. Ask your contractor to complete this form on Day 1, so you aren’t scrambling for it later.
Form W-9 (Request for Taxpayer Identification Number or TIN) starts easily by verifying your freelancer’s name and address. Next, Box 3 (at the top of the form) will let you know how your contractor’s business is classified. So long as they’re not running an S corp or a C corp and you’re not paying via credit card or a third-party payment platform (like PayPal), then you can plan on filing the IRS Form 1099-NEC in January. (More on that below.)
Moving on: Part I covers their Taxpayer Identification Number—which is simply a Social Security number or an employer identification number (EIN)—so they can’t dodge the IRS during tax return time, which includes paying self-employment taxes (i.e., Social Security taxes and Medicare taxes).
Part II also helps you confirm that they’re legally allowed to work in the U.S. as a U.S. resident or citizen.
When reviewing the contractor’s W-9, ensure they have exempted themselves from tax withholding. As self-employed individuals, they should file their own income taxes every tax year. We have an entire post dedicated to how to fill out a W-9, which you may want to share with your contractor.
PRO TIP: If your freelancer is an international resident or citizen, collect Form W8-BEN
Step 4: Fill out two 1099-NEC forms (Copy A and B)
Mark your calendar, because this information return comes with a filing deadline. In January, look at how much you’ve paid the independent contractor over the past year. If you’ve paid them more than $600 in non-employee compensation within the past calendar year and their business entity is not an S corp or C corp, you’ll need to file a 1099-NEC form to report payments (Form 1099-MISC is no longer used for this).
Pro tip: If you paid your contractor via credit card or a payment platform (e.g., PayPal), you may not need to file a 1099-NEC. The payment settlement entity may be required to file a 1099-K.
Coming soon: Starting in 2026, the 1099-NEC filing threshold will change from $600 to $2,000.
The 1099-NEC reflects how much an independent contractor earned (but not including payments made via credit cards or third-party settlement platforms) while working with you, the payer. Both you and your contractor have tax obligations.
Every 1099-NEC comes with a Copy A and a Copy B. You’ll file Copy A with the IRS and send Copy B to your contractor. Because the 1099-NEC is not part of the Combined Federal/State Filing Program, you may also need to provide a 1099-NEC to your state and/or the state where your contractor resides or works. Check in with your CPA for state tax advice to remain compliant.
The due date is January 31: Make sure you send the 1099-NEC to the IRS and your contractor by the last day of January. If that happens to fall on a weekend, you have until the following Monday.
If you choose to mail your 1099-NEC Copy A to the IRS, be sure to include Form 1096: Annual Summary and Transmittal of U.S. Returns. This is a cover sheet for paper submissions.
To file 1099s with the IRS electronically through the FIRE system, you’ll need a Transmitter Control Code (TCC), which can be requested via Form 4419. It takes time to process paperwork, so don’t delay on that Form 4419. You have to submit it by November 1 of the year before you plan to electronically file your 1099s. Still have questions about electronic filing? IRS Publication 1220 has detailed instructions on how to e-file your 1099s.
To email Copy B to your contractor, you’ll have to get their written consent to deliver the document electronically. Be sure to follow these IRS requirements for consent to electronic delivery before emailing a contractor his/her 1099-NEC. Otherwise, you’ll need to send it via post.
Best practices for keeping your paperwork in order
Records, records, records. Once you’ve nailed down the tax requirements, there are other habits you should pick up to keep your working relationship with the contractor going as smoothly as possible.
As with other business activities, hold on to every single document related to your work with a freelancer: contracts, invoices, proof of payment, and more. Here are a few tricks of the trade that will help you stay compliant (and sane).
Ask your independent contractor for invoices
Only pay your 1099 contractor once they’ve sent an invoice your way. Save every invoice for your records. And don’t accept any additional business expense reimbursement reports. Why? Because with great freedom comes great responsibility… so expenses for their business are the responsibility of the freelancer.
Add your freelancer to payroll
Wait, I know what you’re going to ask: “Can’t adding freelancers to payroll blur the lines between contractors vs. regular employees?” In some cases, adding them to payroll is OK. Depending on how long the assignments will last, it may be easier—and more efficient—to add them directly to your company’s payroll for direct deposits into their bank accounts.
If there is uncertainty about whether or not someone is a contractor or employee, then the company or the contract worker can submit Form SS-8 to the IRS, which will render a determination on the worker status based on a range of factors, including the written contract, type of relationship, and degree of control over the work. (This employee classification distinction between employees and contractors is why the government has looked closely at Uber and Lyft—and the gig economy in general.)
If a type of worker is considered an employee, then federal laws that are administered and enforced by the U.S. Department of Labor (DOL), as well as state laws, must be followed, along with taking out payroll taxes and providing certain protections, such as employee benefits (or unemployment benefits in the event of job loss), at least a minimum wage, overtime pay if eligible, and workers’ compensation if required.
Keep records like a boss
Keeping records organized gets so much easier if everything is shared and stored electronically. There are dedicated apps for invoices and payroll, but what about other documents like contracts, non-disclosure agreements (NDAs), and other work-related files?
Tools to check out:
Dropbox Sign, an electronic signature platform
DocuSign, another electronic signature platform
Google Docs for document sharing and storage
Keeping detailed records is part of being a small business owner, but you don’t need to bury yourself under administrative tasks. By keeping track of your “must-dos” and deadlines, and using tools to streamline processes as much as possible, you can stay on top of all the labor law and tax filing requirements without a lot of extra time and effort.
FAQ
Do 1099 employees pay their own taxes?
Yes, 1099 employees pay their own taxes, including self-employment taxes like Social Security tax and Medicare tax. That means businesses that hire independent contractors don’t have to withhold any money from their payments for taxes.
Can a business control how a 1099 worker completes their work?
No, a business can’t control how a 1099 worker completes their work. Businesses might have specific requests, like asking a contractor to visit the workplace to perform certain tasks or take meetings at particular times, but ultimately it’s up to the independent contractor to decide how, where, and when to do their work.
What kind of jobs or roles are typically considered 1099?
The jobs and roles that are typically considered 1099 span a wide range. The IRS defines an independent contractor as anyone in an independent trade, business, or profession that offers services to the general public.
Common types include freelancers like copywriters, photographers, illustrators, graphic designers, and web designers. Consultants in areas like IT, marketing, social media, and business development are also 1099 contractors.
If your business hires lawyers, business accountants, interior designers, delivery drivers, cleaners, landscapers, plumbers, or general contractors, those are oftentimes considered 1099 employees.
What forms does a business need to file for 1099 employees?
A business needs to file Form 1099-NEC for a 1099 worker to report non-employee compensation. Your business should also keep an independent contractor’s W-9 on hand, though you don’t need to file that anywhere.
Can a 1099 contractor work for multiple clients at the same time?
Yes, a 1099 contractor can work for multiple clients at the same time.
