A 1099 employee - more accurately known as an independent contractor, freelancer, or gig worker - is an individual who provides services under the terms of a contract but is not a traditional employee.
The term comes from the IRS form 1099-NEC, which businesses use to report payments made to such workers for non-employee compensation.
Key characteristics:
They operate their own business (often as sole proprietors) and work independently.
They control how, when, and where their work is done – they are responsible for delivering results, not for taking direction.
They do not receive benefits like health insurance, paid leave, or retirement contributions.
They must cover their own taxes, including self-employment, Social Security, and Medicare.
Aspect | 1099 contractor (independent) | W-2 employee (traditional) | |
Tax withholding | No employer withholding; contractor pays self-employment taxes | Employer withholds income tax and pays employer taxes | |
Benefits | No employer-provided benefits | Typically eligible for benefits (healthcare, retirement, etc.) | |
Control | Contractor controls how work is done | Employer directs work procedures and schedule | |
Reporting form | Form 1099-NEC | Form W-2 |
Misclassification can occur when, on paper, a worker is labelled as a contractor but in practice is treated like an employee – this can trigger legal and financial penalties.
Benefits for businesses:
Flexibility & scalability: easily onboard specialised talent for specific projects or short-term needs without long-term commitment.
Cost savings: no employer-side payroll taxes or statutory benefits.
Access to global talent: especially useful when partnering with remote, skill-specific contractors.
Risks to watch:
Legal penalties: misclassifying a PAYE-eligible worker as a contractor may lead to back taxes, fines, and legal actions.
Loss of oversight: less control over work quality and schedules compared to in-house staff.
No legal protections or benefits for the worker: could hurt morale or long-term engagement.
High-profile cases like Uber illustrate what can go wrong: independent contractors have filed litigation claiming misclassification, with potentially huge financial consequences for companies.
The IRS uses a three-part test to evaluate whether a worker is an independent contractor or an employee:
Behavioral control: who dictates how and when the work is done?
Financial control: who controls the business aspects like method of payment, tools, and expenses?
Type of relationship: is the relationship ongoing? Are benefits provided? What's the contract like?
Misclassification lacks a “magic formula", so document your rationale clearly.
In uncertain cases, businesses or workers can file IRS Form SS-8 to officially determine the classification, though it may take several months to resolve.
Prepare a clear, written contract detailing deliverables, terms, and duration.
Ensure the contractor has control over their methods and tools.
Avoid providing benefits like healthcare, paid leave, or training.
Issue Form 1099-NEC when payments exceed $600 within a tax year.
Keep detailed payment and engagement documentation in case of an audit.
Global payroll services: outsourced solutions for managing international employee compensation.
Employer of Record (EOR): a service provider that legally employs staff on behalf of companies expanding internationally.
Salary benchmarking: comparing pay scales across industries and regions to ensure fair compensation.
Independent contractor payments: compensation for freelancers or consultants, often distinct from accrued payroll.