A happy male 1099 employee sitting at a desk and working on his laptop

1099 Employees: What to Know to Stay Compliant

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In today's dynamic talent landscape, businesses often turn to 1099 employees, also typically called contractors, to fill specialized roles or take on project-based needs.

Employers engaging 1099 employees must understand the key distinctions that differentiate them from traditional W-2 employees.

The following guide discusses the basics of 1099 employees, explores the pros and cons of engaging contractors, and presents key takeaways for building a compliant distributed workforce.

What is a 1099 employee?

A 1099 employee is a U.S. contractor, freelancer, or other contingent worker a company engages for specialized skills or niche expertise. Companies often engage 1099 employees for short-term projects, to test or quickly enter foreign markets, or to fill specific workloads without the commitment and costs of hiring full-time employees.

1099 refers to the U.S. Internal Revenue Service (IRS) tax form businesses use to report payments to contractors, consultants, freelancers, and other self-employed people who work for the company but are not employees.

1099 employees fit many different types of job roles and industries. Examples include marketing and writing, website development, sales, customer service, human resources, accounting, and bookkeeping.

1099 vs. W-2 employee

While a 1099 employee is a contractor, a W-2 employee, or a common-law employee, is a U.S. worker who is part of a traditional employer-employee relationship: the employer controls the work the W-2 employee performs and how they complete it.

Several factors differentiate a 1099 contract position and a W-2 employee from each other. The primary difference is that 1099 employees generally do not receive the same entitlements and protections as W-2 employees under local labor laws.

Contractors must pay their income taxes and contributions, while the employer automatically deducts taxes from a W-2 employee’s paycheck. A full-time employee uses Form W-2, while a contractor uses Form 1099-NEC to file taxes.

Some other key differences between contractors and W-2 employees include the following:

A 1099 employee:A W-2 employee:
Works for one or more clientsWorks for one employer
Does not require onboarding or trainingUndergoes extensive onboarding and training
Determines when and how they workThe employer determines how and when they work
Receives pay according to their contract agreement, typically upon project completion

Receives an hourly or salary wage


Is not entitled to benefits from their clientsIs entitled to statutory benefits from their employer
Fulfills all tax responsibilities themselvesThe employer withholds and contributes to taxes for the employee


Are your workers compliantly classified? Use our contractor risk assessment checklist to find out and learn how to avoid misclassification:

Risk assessment for global contractors - Get the guide.

Hiring 1099 employees: pros and cons

There are advantages and disadvantages to hiring a 1099 employee. We discuss some of these pros and cons below.

Pros to hiring 1099 employees

1099 employees offer many benefits for companies seeking to quickly expand their capabilities. Some key benefits to engaging 1099 employees include the following:

  • Access to a broader talent pool. Companies can hire talent with the most relevant skills and expertise for their specific needs, regardless of the contractor’s location. 
  • Entry into foreign markets. Global companies can quickly test new markets for expansion and gain valuable local knowledge and connections by engaging international contractors
  • Quick and easy onboarding. Contractors do not require extensive training, onboarding, or payroll associated with long-term employee investment. 
  • Workforce scalability. Contractors allow employers to grow or reduce their workforce as needed, and they can quickly scale up teams during peak periods and downscale during slower times.
  • Flexible commitment. Companies can easily engage contractors for short-term projects and seamlessly discontinue the relationship upon completion. 
  • Cost savings. Businesses save on expenses that would have gone toward full-time employees, such as long-term salaries and benefits like health insurance and retirement contributions. 

Cons to hiring 1099 employees

While there are many benefits to hiring 1099 employees, they also present several risks and challenges that employers should consider:

  • Limited control. Contractors work autonomously by managing their projects and timelines, which makes it more difficult for companies to control their work.
  • Difficulty finding top talent. Due to the lack of benefits and work stability in a contractor relationship, employers may have difficulty securing and retaining top talent.
  • Temporary workforce. A contractor’s temporary nature and ability to work with multiple clients may limit their overall investment in the company's goals and ability to assist with long-term growth. 
  • Workflow disruptions. Engaging contractors for short-term projects may lead to frequent turnover and potential workflow disruptions, as a contractor may not always be available for ongoing needs. 
  • Increased liability. Contractors do not have certain employee protections, such as workers' compensation, and may sue their clients for work-related injuries. 
  • Loss of copyright ownership. Unless explicitly defined in the contract, contractors retain copyright ownership of their work and may increase the risk of sharing sensitive company information.
  • Misclassification risks. If an employer misclassifies their talent, they face severe risks and liabilities, including unpaid taxes, back benefits, legal fines, and reputational damage.

Read more: The Pros and Cons of Hiring Independent Contractors

Engaging contractors: 1099 rules for employers 

Employers must ensure compliance with local rules and classification requirements when engaging 1099 employees. The IRS uses three main criteria to help employers determine whether a U.S. worker is a contractor or an employee.

These factors include:

  • Behavioral control. Does the company control or have the right to control what the worker does and how the worker does their job?
  • Financial control. Does the business control different monetary aspects or benefits of the worker’s job?
  • Type of relationship. Are there written contracts or employee-type benefits, such as pension, insurance, and vacation pay? Will the relationship continue, and is the work performed a vital aspect of the business?

Once you classify the worker as a 1099 employee, have a thorough plan that ensures the type of work and relationship is compliant.

Set expectations from the start, create a written contractor agreement that fully defines the relationship, and establish a system to pay the contractor that does not withhold taxes from their paycheck.

Your Guide to Employee Misclassification

Get a detailed breakdown of employee misclassification, including common causes, penalties, and ways to reduce your risk as you build your workforce.

Man with glasses sitting on a chair with mug in hand

1099 employee rights

1099 employees generally have the following legal rights:

  • Work autonomy. Contractors are flexible and can decide how, when, and where they work. A contractor is responsible for securing and providing expertise, training, and work equipment. 
  • Written contract. Employers and contractors must agree to the terms of the contractor relationship in a written contract, including project scope, timeframe, payment, and termination conditions.
  • Business management. A contractor manages their own business and pays their self-employment taxes. They do not receive employee benefits from their clients, such as health insurance, retirement, or paid vacation. 
  • Multiple clients. A contractor has the right to market their services to other businesses and can work with various clients at once.
  • Contractor partnerships. A 1099 employee may engage other contractors and additional resources to help them complete projects or specific tasks.
  • Payment. Contractors have the right to payment for their services and should agree to a billing rate and frequency with the employer and outline the details in the contractor agreement.

When to hire 1099 employees vs. W-2 employees

Determining whether to engage a 1099 employee versus hiring a W-2 employee contractor depends on numerous factors. Employers should consider their budget, what kind of work they need, the job duration, and how much collaboration they require from their workforce.

Employers may choose to engage contractors over full-time employees for the following reasons:

  • Short-term assignments. Employers may need someone with specific expertise or knowledge to work on a short-term project or assignment. 
  • Save on costs. Companies may wish to reduce costs and resources associated with hiring full-time employees, such as payroll tax, statutory benefits and contributions, work equipment, and ongoing career development and training. 
  • Enter new markets. Global companies interested in expanding into the U.S. can hire 1099 employees directly for market insights without spending time, money, and resources on entity establishment.

Read more: Should You Hire a Contractor or an Employee? 

1099 employee FAQs

The following information discusses common questions regarding 1099 employees. 

Can a 1099 employee work full-time?

A 1099 employee is not a full-time employee. The contractor may work full-time hours if specified in the contract, but they fall under a 1099 worker classification and do not receive the same employee rights and benefits as a full-time employee. 1099 employees may also work for more than one client, which may hinder their ability to work full-time hours with any one client.  

How many hours can a 1099 employee work?

A 1099 employee’s hours depend on what they agree to with the employer, outlined in the contractor agreement. A 1099 employee’s hours may fluctuate based on the project, and there is no cap on hours unless specified in the contract. A 1099 employee may work as many hours as they want; however, they do not qualify for overtime.

How many 1099 employees can a company have?

A company can have as many 1099 employees as it needs as long as the employer classifies their workforce correctly and establishes the appropriate parameters and guidelines for the type of working relationship.

What paperwork do you need for a 1099 employee?

Businesses must use Form 1099-NEC (non-employee compensation) to report payments to 1099 employees. Companies must report and file any compensation exceeding $600 annually for contractors, consultants, freelancers, and other self-employed people who perform work or services for the company but are not employees.  

For tax reporting, the 1099 employee fills out a Form W-9, which provides the employer with the contractor’s legal name and Taxpayer Identification Number (TIN). The employer uses this information to complete a Form 1099-NEC and report the contractor’s earnings to the IRS. 

How do you pay 1099 employees?

1099 employees don’t have a fixed salary and are not on a company’s payroll. The business and a 1099 employee must establish a pay rate, frequency, and payment method in the contractor agreement.

Typically, the contractor sends an invoice for their hourly or project-based work, and the employer provides a paycheck. The employer does not withhold income taxes from the 1099 employee’s paycheck.

Learn more: How to Pay 1099 Contractors

Ensure classification compliance when engaging 1099 employees

Despite the benefits of hiring 1099 employees, companies must be aware that the U.S. government, as well as governments around the world, are becoming increasingly vigilant in implementing sanctions for worker misclassification.

Businesses engaging or interested in engaging contractors should do their due diligence to ensure they comply with local worker classification laws to avoid severe penalties that could disrupt business operations, business reputation, and their bottom line.

For companies interested in reducing misclassification risk and improving their business’s long-term success by converting contractors to full-time employees, Velocity Global can help.

As a market-leading, full-service employer of record, Velocity Global leverages years of experience and local expertise across more than 185 countries to help businesses quickly and compliantly onboard, pay, and support full-time employees in the U.S. and beyond while reducing risk and lowering costs.

Contact Velocity Global today to learn how we help you seamlessly build a high-quality, distributed workforce while staying on the right side of labor laws.


Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.

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