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GLOSSARY

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Workforce Glossary

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1099 Workers

In the U.S., a 1099 worker refers to an independent contractor or freelancer who receives payments reported on IRS (Internal Revenue Service) Form 1099, rather than a W-2 form, which is used for employees. The IRS classifies workers as either employees (W-2) or independent contractors (1099), and the tax obligations differ significantly between the two. 1099 workers are responsible for their own taxes, including self-employment taxes, and do not receive employee benefits such as health insurance or retirement contributions.

Advantages of hiring a 1099 worker

Cost savings

Employers can significantly reduce overhead costs by hiring 1099 workers. Unlike W-2 employees, independent contractors are not entitled to benefits like health insurance, paid leave, or retirement contributions. Moreover, businesses save on payroll taxes, as contractors are responsible for their own Social Security and Medicare contributions. For companies operating on tight budgets or managing fluctuating workloads, hiring 1099 workers provides a cost-effective staffing solution.

Access to specialised skills

Independent contractors often possess niche expertise, making them ideal for short-term or project-based work. Whether it’s designing a website, managing a marketing campaign, or providing legal consultation, 1099 workers bring a wealth of specialised knowledge without the long-term commitment of a full-time hire. This allows businesses to access top-tier talent for specific tasks, ensuring high-quality outcomes while maintaining flexibility.

Scalability

One of the greatest benefits of hiring 1099 workers is the ability to adjust the workforce according to business demands. Companies can quickly onboard contractors for peak periods, large projects, or seasonal needs and then scale down once the work is complete. This adaptability ensures operational efficiency, allowing businesses to meet market demands without the financial burden of maintaining a large, permanent workforce.

Advantages of being a 1099 worker

For businesses, engaging 1099 workers can mean access to specialised talent without the obligations of full-time employment. However, this structure requires careful adherence to classification rules to avoid costly missteps in taxes and compliance. Here’s a detailed look at the advantages, legal considerations, and resources for 1099 workers and employers alike.

Flexibility

1099 workers enjoy significant freedom over how and when they work. Unlike W-2 employees who follow set schedules, independent contractors can design their own workdays, allowing for better work-life balance. This flexibility enables them to prioritise personal commitments, take on projects that align with their interests, and even explore creative or entrepreneurial endeavours alongside their primary work.

Tax deductions

One of the key benefits of being a 1099 worker is the ability to reduce taxable income through deductions. Independent contractors can claim expenses related to their business, such as:

  • Home office: A dedicated workspace used exclusively for work.
  • Equipment: Items like laptops, phones, and tools required for completing projects.
  • Travel: Expenses incurred for business-related trips, including mileage, flights, and lodging.

By tracking these expenses carefully, contractors can lower their tax liabilities, making financial management a critical aspect of their operations.

Diverse opportunities

Freelancers and independent contractors have the unique advantage of working with multiple clients simultaneously. This diversity not only enhances their professional experience but also provides financial security by spreading income across various sources. Additionally, working across industries and projects allows 1099 workers to build a robust portfolio, expand their network, and position themselves for lucrative opportunities in the future. This versatility is often a driving force behind the decision to pursue independent work.

1099-NEC vs. 1099-MISC

The 1099-MISC and 1099-NEC forms serve distinct purposes when it comes to reporting income to the IRS, making it crucial for both businesses and contractors to understand their differences for accurate tax compliance.

1099-NEC

The 1099-NEC form is specifically used to report non-employee compensation, which includes payments made to independent contractors, gig workers, and self-employed individuals for services rendered, such as completing projects or assignments. Prior to 2020, these payments were reported on the 1099-MISC form, but the IRS separated them into the 1099-NEC to simplify reporting and ensure that non-employee compensation was clearly distinguished from other types of income.

Businesses are required to file a 1099-NEC when they pay a contractor over $600 in a tax year. The form must be submitted to the IRS by January 31 of the following year (or the next business day if the 31st falls on a weekend or holiday). It’s also important to note that payments to C corporations or S corporations are exempt from filing a 1099-NEC, as this can be determined through the contractor’s Form W-9. A significant risk of misclassifying employees as contractors and filing a 1099-NEC instead of a W-2 can lead to steep penalties. Understanding this distinction is essential to avoid potential legal and financial issues.

1099-MISC

The 1099-MISC form, while still in use, is now reserved for reporting miscellaneous types of income that are not subject to self-employment taxes. This includes payments such as rents, legal settlements, or prize winnings, provided the total amount paid to an individual or LLC exceeds $600 within a tax year. The due dates for filing a 1099-MISC are March 1 for paper submissions and March 31 for electronic filings, or the next business day if these dates fall on a weekend or holiday.

The 1099-MISC form is used to ensure accurate reporting of miscellaneous income types, which don’t require self-employment tax contributions but are still taxable. This is important for businesses as it helps them comply with IRS requirements for reporting various income streams.

How to find 1099 jobs

Finding 1099 jobs requires a strategic approach to connect with potential clients and stand out in a competitive market. Leveraging platforms like Upwork, Fiverr, and LinkedIn can help showcase your skills and gain visibility among clients actively seeking independent contractors. Networking within industry groups, attending freelancing events, and participating in online forums can also open doors to valuable opportunities. Additionally, tailoring your pitch and portfolio to highlight your expertise and the value you bring to specific projects can make a strong impression, increasing your chances of securing contracts.

When hiring 1099 workers, there are several legal considerations that both businesses and workers need to be aware of to ensure compliance with tax laws, labour regulations, and contract agreements. These considerations can help avoid potential legal and financial consequences.

1. Worker classification

One of the most important legal issues is ensuring that workers are properly classified as independent contractors (1099) and not as employees (W-2). Misclassifying workers can lead to penalties, back taxes, and legal claims.

The IRS uses a set of guidelines to determine whether a worker should be classified as an independent contractor or an employee. These guidelines focus on factors such as the level of control the business has over the worker’s tasks, the worker’s ability to work for other businesses, and the degree of financial independence.

Some states, like California, use the ABC test to determine worker classification, which is a stricter test for determining whether someone is truly an independent contractor.

2. Tax obligations

Independent contractors are responsible for paying self-employment taxes, including Social Security and Medicare taxes. Employers do not withhold these taxes from payments made to contractors, and contractors must report them when filing their taxes.

Unlike employees, businesses do not withhold federal income tax, Social Security, or Medicare taxes from a 1099 worker’s pay. Contractors must be aware that they are responsible for making estimated quarterly tax payments to avoid penalties.

3. Written contracts

It is crucial for businesses to have a written contract that clearly defines the terms of the working relationship with 1099 workers. The contract should outline the scope of work, payment terms, deadlines, and other key conditions such as confidentiality and intellectual property rights.

A well-drafted agreement helps clarify that the worker is an independent contractor and not an employee, which further protects the business from potential legal disputes.

4. Non-discrimination and labour laws

While independent contractors are not subject to many labour laws that govern employees (such as minimum wage and overtime laws), businesses must still be mindful of anti-discrimination laws. Contractors cannot be treated differently based on their race, gender, disability, etc., in violation of discrimination laws. Even independent contractors are protected by certain anti-retaliation provisions if they report illegal practices or workplace safety violations.

5. Benefits and legal rights

1099 workers are not entitled to employee benefits like health insurance, paid leave, or retirement contributions. Businesses should make it clear in their contracts that these benefits are not provided.

Independent contractors do not have the same rights as employees, such as protection under the Fair Labour Standards Act (FLSA), but they are still entitled to certain protections, such as those related to non-payment for services or breach of contract.

6. Intellectual property (IP) and confidentiality

The contract should specify who owns the intellectual property created during the course of the work. Typically, the business will want to retain ownership of the IP, but the agreement should make this explicit.

If the contractor will be privy to sensitive information, a confidentiality agreement should be included to protect business interests and trade secrets.

7. State and local laws

Many states have their own laws regarding the classification of independent contractors. For instance, California’s AB 5 law applies a more stringent test for determining whether a worker is an independent contractor or an employee. Employers need to be aware of these state-specific rules.

In some cases, contractors may need to be licensed for certain types of work (e.g., construction, healthcare). It’s important to ensure that contractors are appropriately licensed and meet any state or local legal requirements.

8. Termination of contracts

The contract should define the process and conditions under which either party can terminate the working relationship. Without a clear termination clause, the business may face legal action if the contractor disputes it or claims wrongful termination.

To avoid misclassifying workers, companies can work with a compliance partner, such as CXC, which has a proven track record in managing independent contractors both in the U.S. and internationally. These experts help ensure that workers are classified correctly according to labor laws and tax regulations, minimizing the risk of costly penalties and legal issues.

Workers’ Compensation for 1099 Contractors

Unlike W-2 employees, independent contractors are typically not covered by workers’ compensation insurance. This means that if a 1099 worker is injured while performing their duties, they are generally responsible for their medical expenses and recovery costs. However, businesses and contractors can negotiate terms within their service agreements to include coverage or alternative provisions for injury-related incidents, especially for high-risk projects.

1099-MISC box 10

Box 10 on Form 1099-MISC is specifically used to report gross proceeds paid to an attorney. This reporting requirement ensures transparency for tax purposes when legal services or settlements are involved. Businesses working with attorneys should be diligent in accurately completing this section to comply with IRS regulations.

Contractor expense reimbursement

Independent contractors are usually expected to cover their own expenses, such as travel, equipment, or materials. However, reimbursement policies can be established through pre-negotiated agreements. For instance, a contractor working on-site might arrange for travel or accommodation expenses to be covered by the hiring company. Clearly outlining these terms in a service agreement helps prevent misunderstandings.

Can 1099 workers get health insurance?

Yes, 1099 workers can obtain health insurance, but unlike traditional employees, they are responsible for securing their own coverage. Many independent contractors obtain health insurance through the Affordable Care Act (ACA) marketplace, where they can shop for plans, or through private insurers. Some may also get coverage through professional associations or industry groups that offer group rates.

Because 1099 workers are not eligible for employer-sponsored health plans, this responsibility can be an additional financial burden. However, independent contractors can often deduct health insurance premiums on their tax returns, which can help reduce taxable income and offer some financial relief. Additionally, based on income, contractors may qualify for subsidies or tax credits through the ACA marketplace.

How many hours can a 1099 contractor work?

Independent contractors are not bound by traditional work hour restrictions or overtime rules. Instead, their focus is on delivering agreed-upon results within the deadlines specified in their contracts. This flexibility allows them to manage their own schedules, making it possible to take on multiple projects simultaneously. However, clear communication about deadlines and expectations is crucial to ensure mutual satisfaction between contractors and clients.

1099 and W-2 taxes

For W-2 workers (employees), the employer is responsible for withholding federal income tax, Social Security, and Medicare taxes from the employee’s paycheck. The employer also contributes an equal amount to Social Security and Medicare taxes.

At the end of the year, the employee receives a W-2 form, which reports total earnings and the taxes withheld, and the employee files these taxes on their personal return. The W-2 includes key details such as:

  • State income: Amount withheld for state income tax.
  • Medicare and social security income: Contributions withheld to pay FICA taxes.
  • Taxable income: Total earnings and federal taxes withheld.

On the other hand, for 1099 workers (independent contractors), no taxes are withheld by the employer. Instead, 1099 workers are responsible for calculating and paying their own taxes, including self-employment taxes (which cover both the employee’s and employer’s portion of Social Security and Medicare taxes). 1099 workers typically make quarterly estimated tax payments to the IRS.

At the end of the year, they receive a 1099-NEC form that reports their total earnings, and they file these earnings on their tax return.

Full-time W-2 employees

An organisation hires W-2 employees to work under its direct supervision and policies. They are typically full-time or part-time staff who receive consistent wages or salaries. One key advantage of employing W-2 workers is the range of benefits they often receive, including:

  • Health insurance: Many employers offer comprehensive health insurance plans covering medical, dental, and vision needs.
  • Retirement plans: Employers frequently contribute to 401(k) plans or other retirement accounts, helping employees save for the future.
  • Paid leave: W-2 employees usually receive paid time off (PTO) for vacation, sick days, and parental leave.

W-2 vs. W-9 vs. 1099

A W-9 form is a tax document used by businesses to collect taxpayer identification information from independent contractors, freelancers, or other entities they hire. When a business engages a contractor for services, the contractor completes a W-9 form, providing details such as their legal name, business name (if applicable), address, and taxpayer identification number (TIN).

This information is essential for the business to issue a 1099 form at year-end, summarising the payments made to the contractor for tax reporting purposes. The W-9 form itself is not submitted to the IRS but retained by the business for accurate record-keeping and compliance.

W-2, W-9, and 1099 forms have different purposes in employment and tax reporting:

  • W-2 form: This form reports employee earnings, including wages, tips, and withheld taxes, which employers file with the IRS and provide to employees for tax filing.
  • W-9 form: Used by independent contractors to provide taxpayer identification information, such as a Social Security number (SSN) or Employer Identification Number (EIN), to the business paying them.
  • 1099 form: Summarises non-employee compensation for contractors or freelancers, documenting income that must be reported for self-employment taxes.

1099 resources

Navigating 1099-related tasks requires access to the right tools and knowledge. Here’s a breakdown of essential resources:

W-9 form 2024

Contractors can download the latest version of Form W-9 directly from the IRS website to provide their taxpayer information to clients.

Self-employed tax return form

For self-employed individuals, Form 1040 is the primary document used to file annual income taxes. Schedule C, which accompanies Form 1040, allows contractors to report their business income and deduct eligible expenses like office supplies, travel, or equipment costs. This process ensures accurate reporting of net income, which is subject to self-employment taxes, including Social Security and Medicare.

Service agreement

Before commencing work, independent contractors should draft a comprehensive service agreement with their clients. This document should specify project details, payment structures, deadlines, and responsibilities for both parties. A well-drafted agreement not only establishes professional boundaries but also mitigates disputes by clarifying expectations and contractual obligations.

Where can I find 1099 forms?

Businesses can find 1099 forms from several sources, including the IRS website, where forms can be downloaded and printed directly. The IRS provides these forms for free.

In addition, many tax preparation software programs allow businesses to generate, file, and distribute 1099 forms electronically, offering a convenient option for timely and accurate filing. Some local tax offices or bookstores may also offer physical copies of the forms, but electronic filing through the IRS or tax software is generally more efficient.

How we can help?


Finding and hiring talent can be challenging, costly, and time-consuming. However, with CXC as your flexible staffing partner, this doesn’t have to be the case.

With more than 30 years of experience in the contingent workforce space, our team of experts is here to guide you every step of the recruitment process. Whether you need temporary staffing or remote workers, we have tailored workforce solutions that can fit your specific needs.

This way, you don’t have to worry about compliance and administrative burden, and you can focus on what matters most: growing your business.

CXC Global