Since 1099 workers are self-employed and not considered regular employees, they can act as freelancers offering services to different clients without having a long-term commitment to a single employer. In addition, 1099 employees are responsible for handling their taxes, insurance, and benefits.
A crucial difference between a 1099 employee and a traditional W-2 employee is in their employment status and tax implications. W-2 employees are considered regular employees who receive a set salary or hourly wage, along with benefits like health insurance, paid time off, and retirement plans. Employers are responsible for withholding taxes, Social Security, and Medicare contributions from W-2 employees’ paychecks. On the other hand, 1099 employees must handle their tax obligations, as employers do not withhold taxes from their payments. The ‘1099’ part of the name comes from the tax form that these workers receive at the end of the year, which is called a 1099-MISC or 1099-NEC.
Over the past few years, 1099 employees have become more and more common among businesses. The move to remote work has made it easier than ever to bring on a 1099 employee to help with projects or skill-focused job duties. There are several benefits to being a 1099 employee, including the freedom to choose projects, set work hours, and negotiate payment rates.
It is important to note that the company should be thoroughly prepared before bringing on a 1099 employee. The best practice is to define the scope of work, determine compensation, draft a comprehensive contract, understand tax implementations, and understand how to communicate effectively with the contractors you partner with.