1099 Employee: The Pros and Cons of Hiring One

Pablo Baldoma

Pablo Baldoma

Hiring a freelance remote employee can be the solution for your temporary projects.

You do not have to recruit a full-time employee for every position. If your company needs specialized skills for a short-term project, it may be more cost-effective to hire a remote freelancer or independent contractor.

Independent contractors are not permanent employees on your company’s payroll. You assign your company employees a work schedule and provide them with mandatory benefits, training, and working tools.

Independent contractors, also known as 1099 employees, are a different matter. It’s critical to know the difference between regular salaried employees and 1099 employees to avoid the consequences of employee misclassification.

To help you prevent legal issues and penalties, here’s a breakdown of everything you need to know about 1099 employees, along with the benefits and risks involved in hiring them.

What is a 1099 Employee?

A 1099 employee is a self-employed individual who files a 1099 tax form with the IRS to report their income. Independent contractors, freelancers, and gig workers are all considered 1099 employees.

In contrast, part-time or full-time permanent workers are considered W-2 employees. Companies are required to send a W-2 form to each employee, as well as the IRS on the employee’s behalf, at the end of each year. The W-2 shows an employee's annual earnings and the amount of taxes withheld from their pay.

Unlike W-2 employees, 1099 workers are responsible for reporting their income and paying their self-employment taxes, including Medicare and Social Security.

Take note that since they are not legally defined as employees, the term "1099 employee" can be confusing.

Different Categories of 1099 Employees

As self-employment becomes more common, different definitions have emerged to differentiate the various natures of work. All of the following job titles qualify as 1099 employees:

  • Freelancer: A person paid by the job, task, or hour, usually for a short-term project. Unless hired to work exclusively for one organization, freelancers often work with several clients simultaneously.
  • Gig Worker: An individual who works on a temporary or flexible basis, usually via an online app or platform. Lyft, Uber, and other ride-sharing providers commonly hire gig workers.
  • Crowd Worker: Crowd work, also known as crowdsourcing or platform work, refers to the outsourcing of tasks to a large pool of online crowd workers via an online platform.
  • Outsourced Teams:  External or third-party teams hired to perform tasks, manage operations, or offer services to a paying company.

How to Classify a 1099 Employee

Compliance requires the distinction between employees and 1099 workers. The IRS has issued classification rules to help properly categorize workers.

In general, an individual is considered an independent contractor if the payer has the authority to control or influence only the outcome of the job—but not how it will be accomplished.

As an employer, consider the following factors when determining whether a worker should be classified as an independent contractor or an employee:

  • Behavioral. Do you have control or the right to control over what the worker does and how the worker executes their job? You probably hired a 1099 worker if they operate autonomously without you directing how, when, or where they do the task. As a client, you only have the right to the result of their work.
  • Financial. Do you have control over the business aspects of the worker's employment, such as their payment, reimbursement of expenses, and provision of equipment? With a greater degree of control may come the need to elevate their status to a regular employee.
  • Type of Relationship. Is the worker entitled to benefits? Is the partnership expected to continue indefinitely? Is the worker's contribution critical to the company's daily operations? If you hired someone to complete a project in two weeks, you have an independent contractor. However, if you have a dedicated person who works for an extended period and is an essential part of your team, they should have employee status.

The Pros of Hiring a 1099 Employee

In some scenarios, hiring a 1099 employee makes more sense than hiring a W-2 employee. Recruiting independent contractors has the following advantages:

1. Access to a Bigger Talent Pool

You can readily tap into a global talent pool, and hire independent contractors to remain competitive. You do not need to establish a foreign subsidiary or use EOR services to recruit contractors in countries where this type of work is regulated by law and the contractors are registered as taxpayers.

2. Increased Staffing Flexibility and Efficiency

When your workload is unpredictable and fluctuating, hiring independent contractors allows you greater flexibility. It's more cost-effective and faster to hire 1099 contract employees than full-time employees during certain months or seasons when you're busier than usual and need help.

You may also benefit from increased efficiency with 1099 workers. Independent contractors have specific skill sets and need little training to start working right away.

3. Reduced Business Expenses

Companies typically pay their employees more than they do their contractors. Hiring an employee entails additional expenses like payroll taxes, life insurance, medical and dental plans, office space, equipment, licensing fees for tools, and more.

In the United States, additional employee expenses can add at least 20% to 30% to an employee’s base salary.

4. Little or No Training Expenses

Training is one of the most expensive investments a business can make. However, you do not need to worry about this because independent contractors frequently invest in their own training and skills development.

Independent contractors bring specialized skills and knowledge to the table. You don't need to train them or go through an onboarding process because they already know how to perform the task you hired them to do.

5. Protection from Lawsuits

Unlike employees, independent contractors cannot sue you for wrongful termination. Of course, you must check that they are correctly classified and that you are not in violation of any agreement you may have signed. But if you wish to end your partnership, you can simply inform the contractor by email or in person.

The Cons of Hiring a 1099 Employee

Despite the many advantages, hiring independent contractors also comes with the following drawbacks:

1. Less Control over Workers

One of the challenges that employers face in the new normal is having less control over their contractors’ work. Contractors value autonomy when working, making it difficult to monitor them. They don't work at your facility and may not be available during your business hours. You must rely on asynchronous communication and base your working relationship on trust.

2. Lack of Employee Loyalty

Employees can be fantastic brand advocates if you give them an exceptional employee experience, but this is not the case with independent contractors. They may be happy with the partnership, but they will not be as invested or loyal as full-time employees.

Contractors may also be unavailable for your next project because they work for many clients. If you want the same people to work on your projects, consider hiring regular employees.

3. Lack of Copyright Ownership

A contractor owns the rights to the intellectual property (IP) they produce on the job unless otherwise stated in the independent contractor agreement. In contrast, employers generally own any intellectual property created by their employees, giving them greater control over sensitive data.

4. Increased Liability for Workplace Injuries

Employers pay the workers' compensation insurance premiums, and employees waive their right to sue their employers in the event of on-the-job accidents.

Independent contractors, on the other hand, are rarely protected by their employer's insurance and rarely purchase their own. As a result, they have the right to sue their employer for damages related to workplace injuries.

5. Risk of Worker Misclassification

Government authorities in the United States and throughout the world are constantly on the watch for companies that deliberately or unintentionally misclassify workers as independent contractors. Misclassifications place your company at risk for several fines, penalties, and back taxes.

Conclusion

Working with independent contractors is a terrific option since it gives you access to a highly sought-after talent pool while also allowing you to save money. As long as you do your due diligence and do not attempt to cut any corners with the IRS, working with 1099 employees has many advantages. Moreover, if you find high-performing workers, you can count on them to deliver the greatest outcomes.

Find the best talent for your business and projects with Celerative. The Celerative experience provides a transparent, efficient, and risk-free solution that enables you to reduce liability, scale effortlessly, and keep moving forward.

Learn more about how Celerative works and how we can help your team grow and achieve your business goals.