Contractor Management

Different offerings and benefits of 1099 employee

Mayank Bhutoria
14
min

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Considering the benefits of being a 1099 employee over a traditional employee (W-2), the number of independent global workers is increasing.  According to a 2022 study report, in 2022, the number of independent workers was about 31.9 million in the United States, an increase from 15.8 million in 2020.

The market for 1099 employees is expanding as companies look to reduce labor expenses and have the flexibility to hire employees as needed. 

This blog will help you to know about the different offerings and benefits of being a 1099 employee. We also inform you about the potential drawbacks of this classification.

What is a 1099 employee?

A 1099 employee or an independent contractor provides services to an organization without being on the organization's payroll. Freelancers, consultants,  independent contractors, and even gig workers fall under the bracket of 1099 employees.

The term "1099 employee" is coined from an Internal Revenue Service (IRS) form, “Form 1099-MISC (Miscellaneous Income)”, that is used to report various types of income other than salaries, wages, and tips—the specific form used by independent contractors and other non-payroll employees to report their earnings.

According to a 2022 study report, in 2022, the number of independent workers was about 31.9 million in the United States, an increase from 15.8 million in 2020. According to LinkedIn's Future of Recruiting research, the number of job listings for contract positions increased by 26% between May and November 2022 compared to the same period in 2021.

1099 employees can enjoy more flexibility and freedom over W2 employees (or permanent employees) in choosing their work schedules, projects, and clients. However, they must bear expenses pertaining to their business —  equipment, supplies, and workspace rent. 

Most common types of 1099 employees

From freelance writers to graphic designers, consultants to software developers, almost every non-payroll employee comes under 1099 employees. These independent professionals offer specialized services to companies,. 

There are both pros and cons of being a 1099 employee.

Key Benefits of 1099 Employee

There are many benefits of a 1099 employee.

1. Flexible Working Conditions 

Unlike full-time employees, independent contractors enjoy flexibilities like working hours and where to work from. An employer cannot control a 1099 worker’s work schedule. The biggest perk for flexible work conditions is a better work-life balance.

Most independent contractors prefer to work remotely. They can work from anywhere and are not bound to work from a physical office. Therefore, they can work with multiple clients worldwide, accomplish projects, and earn as much as they want.

2. Greater Control Over Taxes

An independent contractor is responsible for paying their income tax. Unlike permanent employees (W2 employees) they are not subject to any tax deductions at the source. Though paying tax is an added responsibility for an independent contractor, it also opens the door to various tax exemptions such as: . business-related expenses, like home office costs, equipment purchases, etc.. One can even lower their income and self-employment tax (Medicare and Social Security tax) by increasing their contributions to a retirement savings plan.

3. Higher Income Potential

Working as a 1099 employee deprives individuals of several employee benefits, like job security, bonuses, etc., but they have a huge opportunity to earn more.

There are no limitations to the hours one can work or the number of clients one can take up. So, an independent contractor can negotiate contracts, set their own payment terms, and work on several projects at once. As a result, they can increase income based on skills, expertise, and the ability to secure diverse projects.

4. Increased Control Over Work

1099 employees enjoy a higher degree of control over the type of work they undertake, the amount of deliverables within a period of time, and how they execute it. They can choose clients, negotiate terms, and determine project timelines. Such control can lead to a more satisfying work-life balance and fulfilling work experience.

Shortcomings of Being a 1099 Employee

Now that we know some of the benefits for independent contractors, let's look at some of the drawbacks of being a 1099 employee. 

Limited Workplace Protections

1099 employees are also deprived of many workplace protections, such as unemployment benefits, workers' compensation, and certain labor laws. This lack of legal protection can leave independent contractors vulnerable in certain situations.

1. Lack of Job Security

One of the major drawbacks of 1099  employment is that there is no job security. Usually, independent contractors work on a project-to-project basis and are prone to work assignment uncertainty. They are not entitled to collect unemployment benefits as do not fall under formal employment under the purview of many governments in the world. 

Businesses are not required to deduct state and federal unemployment taxes for an independent contractor. 

Additionally, independent contractors are frequently subject to termination at will or in accordance with the terms of their contracts. Very few countries have labor laws protecting contractors in case of termination or severance, such as laws entitling contractors to severance pay.

2. No Employee Benefits

Unlike traditional employees, independent contractors have no such employment benefits. They are not entitled to benefits like health insurance, retirement plans, or paid time off. A 1099 worker has to arrange and pay for these essential requirements, like health insurance, retirement plans, etc., on their own.

3. Tax Responsibilities

While having control over taxes is an advantage, managing and filing taxes independently is a challenging task for independent workers. It can be difficult and time-consuming to navigate tax laws and ensure compliance.

4. Inconsistent Workload

Due to the nature of project-based work, an independent employee may face inconsistent workloads. They may experience periods of high demand followed by slower periods. So, it becomes challenging to predict and stabilize income.

Why do organizations hire independent contractors?

There are multiple advantages of hiring independent contractors over full-time employees. 

1. Hire from a Global Talent Pool

Since most contractors prefer working remotely, hiring independent contractors allows companies to hire from a diverse and global talent pool. Businesses can access specialized skills and expertise that may not be readily available within their existing workforce.

2. Flexibility

Independent workers can be hired project-by-project, allowing companies to be more flexible with their workforce. Companies can hire workers based on the length of the project, seasonal demand, and ad-hoc demands without long-term employment commitment.

3. Cost Savings

Hiring a 1099 employee is less expensive than hiring a traditional employee. Here, the employer doesn't have to bear the overhead costs like renting office space, paid sick leave, health insurance, or other employee benefits.

4. Scalability

Hiring independent contractors allows organizations to scale their workforce up or down based on project requirements. So, companies can easily handle the immediate workforce needs without any long-term commitment.

5. Specific Project Needs

When companies have projects with unique requirements that do not align with the skill sets of full-time employees, independent contractors will be the best solution. They offer organizations the opportunity to bring in specialized talent for specific projects.

Risks of working with 1099 workers

Along with advantages, some risks are associated with working with 1099 employees. Organizations need to be aware of them.

1. IRS Scrutiny and Penalties

The IRS closely monitors worker classification to prevent misclassification and tax evasion. Companies may face penalties, fines, back taxes, and legal consequences in case of worker misclassification.

2. Legal Consequences

Misclassifying workers can even lead to legal consequences. If a worker who believes they have been wrongly classified files a lawsuit, the employers may be required to pay damages, back wages, and attorney fees.

3. Unpaid Benefits and Protections

Misclassification denies workers access to traditional employee benefits and legal protections, impacting their financial security and well-being.

4. Changes in Legislation

Legislative changes can lead to worker misclassification issues. So, companies need to stay informed about legal developments for compliance.

What is 1099 employee misclassification?

Employee misclassification is when a business incorrectly classifies a worker as an independent contractor instead of an employee. 

A 2021 research report shows that about 10 - 30% of US recruiters, who underwent IRS Misclassification Audit, have categorized workers wrongly.

In case of employee misclassification, the employer may face fines for violating tax-paying norms, fines for non-adherence to federal law, and reputational damage.

Example of employee misclassification 

The California federal court has granted preliminary approval for a $30 million settlement in a class-action case involving Jan-Pro Franchising International, Inc., a commercial janitorial company, and about 2,650 California cleaning franchisees. 

The main issue in the 15-year-long battle was the misclassification of franchisees as independent contractors rather than employees.

Jan-Pro Franchising was found to have violated misclassification laws by treating its janitors as independent contractors rather than employees. This misclassification allowed Jan-Pro to avoid paying for the janitors' uniforms, cleaning supplies, and mandatory training and to make unlawful deductions for marketing and management fees. Janitors were required to pay a franchisee fee to work, and Jan-Pro took a percentage of their earnings as "royalties." The court ruled that these janitors were integral to Jan-Pro's business, thus classifying them as employees under California's wage orders.

Although Jan-Pro deliberately misclassified employees, this is often not the case. Many businesses mistakenly treat their contractors as employees by providing benefits and 

bonuses, regulating their work hours and locations, deducting taxes, etc.

To avoid this, partner with an EOR solution like Gloroots. Our compliant experts will ensure you onboard contractors and adhere to local employee classification laws.   workforce is correctly classified and meets global employment compliance standards. Gloroots stays current on changing labor laws and regulations, assisting you in mitigating the risks associated with misclassification.

Avoid 1099 Employee Misclassification With Gloroots EOR 

While working as a 1099 worker offers working flexibility and better earning opportunities to individuals, hiring freelancers and independent contractors also benefits companies. However, companies need to be aware of the associated risks. Partnering with  Employment of Record (EOR) like Gloroots is a win-win situation.

Gloroots offers an efficient contractor management system that makes hiring international contractors easy. With Gloroots, you can expect faster onboarding, 100% compliance, and on-time multi-currency payments at affordable prices.

Gloroots allows businesses hassle-free hiring, compliance with labor laws and local payroll and keeps them from legal complications. Try Gloroots if you want to expand your workforce and hire internationally in a compliant way!

FAQ:

1. How does 1099 employment work?

Ans: 1099 employment is a working arrangement where an individual is classified as an independent contractor rather than a traditional employee. Here, the worker operates as a self-employed entity.

2. How do independent contractors get paid?

Ans: Independent contractors submit invoices for the services they provide. In an ideal case, payment terms, including the amount and timing, are mentioned in the contract between the contractor and the client.

3. How do organizations benefit from hiring 1099 workers?

Ans: Hiring 1099 workers provides organizations with the flexibility, scalability, and specialized skills needed for their projects. Companies can access a global talent pool and get a skilled workforce based on project needs at a lower expense than hiring full-time employees.

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