As a business owner, there are several ways you can choose to classify those who work for you. The two primary ways are as a 1099 or W2 employee.
A W2 employee is what most are accustomed to. If you’ve ever shown up each day to a job, been officially employed by that business, and that company dictated how you work, you were a W2 employee (which is pretty easy to tell because you probably received a W2 at the end of the year for your work).
However, a 1099 employee is very different. In fact, someone on 1099 isn’t an employee at all but is considered an independent contractor.
As an independent contractor, that worker completes work for your business based on an established contract between parties.
That work may be short-term, one-off, or ongoing. However, in every case, that work is dictated by a contract and they are outside contractors, not an employee that works within the company.
Examples of 1099 independent contractors
Chances are, you’ll hire an independent contractor at some point in your business’s lifetime. You may already be considering it (or considering whether you should hire 1099 vs. W2 employees for your business if you’re just starting out).
Here are a few common examples of 1099 independent contractors:
- Some accountants
- Builders
- Marketers (especially in the case of digital marketing agencies or a similar service such as SEO or a social media manager)
- IT / Webmasters
- Web designers
- Freelance writers
Keep in mind, any one of the above can be a W2 employee. What really dictates whether someone is W2 or 1099 is whether you need that person in the office 9-5 working closely with the company or if you need them to do outside work.
This typically comes in the form of a single project or a collection of projects which, when completed, also end that work contract.
Is 1099 a good fit for your business?
How does a 1099 worker differ from a traditional employee? Why would you choose to set up a contract for an independent contractor instead of hiring an employee who will be on-location?
There are several benefits to a 1099 worker that are worth noting while there are a few cons as well when comparing to a salaried employee. Knowing whether an independent contractor is a good fit for your business is about clearly understanding these pros and cons:
Pro #1: They cost less than traditional employees
An independent contractor can potentially save you a good portion of money in several areas, including:
- No unemployment insurance: 1099 workers aren’t employed by your company, so you’re not responsible for paying for unemployment insurance to cover those workers.
- No income or payroll taxes: Again, because a 1099 contractor isn’t technically employed by you, you’re not required to front the cost of state, federal, Social Security, Medicare, or payroll taxes.
- No employer benefits: Independent contractors are considered their own business owners (even if they’re just a sole proprietor), so they pay for their own benefits including health and life insurance and retirement.
Pro #2: They’re specialized experts
Hiring a 1099 worker allows you to pick from what are typically specialized experts in their field.
Typically, employees are more generalized and won’t have the kind of knowledge or experience that an independent contractor has.
That means you’re likely able to get someone that’s much better at what you need to get done by going 1099 for that particular project.
Pro #3: You have less legal risk
Because independent contractors are on 1099, they aren’t considered true employees of your business.
So far, we talked about the potential savings.
But this is advantageous for another reason: you don’t have to pay for workers compensation and they can’t file wrongful termination claims in most cases. This can potentially reduce your legal burden.
Con #1: They’re less connected to your company
1099 workers have their own businesses; you’re simply hiring them to complete a job(s). In contrast, a traditional employee is at your place of business 9-5, 5 days a week (or whatever your schedule is).
This means they’re typically much more committed to your brand and company, more familiar with it, it’s values, and its inner workings in case you need help with something outside of their normal responsibilities, and generally just have someone you can count on for more than their individual role duties.
1099 workers are typically committed to their own companies and, while they may be absolute professionals, aren’t the same as a true employee.
Con #2: They’re specialized
This is both a pro and a con, depending on the situation. Sometimes, they’re just what you need. But if that’s all you have– that is, contractors who complete individual jobs for you– you may find yourself lacking when you need someone to help you around the office in certain unexpected ways.
1099 contractors offer their services and that’s it. There’s no wiggle room if you need someone to help you close up on Tuesdays, assist you on the phone, or talk to customers when they come into the store.
1099 employee: What forms do you need?
So, you’ve decided that using one or more 1099 independent contractors is best for your specific business needs.
Great, now you need to know more about the tax forms which are associated with this particular type of worker. This is primarily IRS Form W-9 (similar teo the W-2 most traditional receive) and 1099-MISC.
Form W-9 is completed by the contractor as a way of providing the company that hired them proof of the work completed and payment issued as a result:
The company then uses that W-9 to prepare Form 1099-MISC for that contractor (if the company has paid the contractor more than $600 for the tax year), which is used by the contractor to report the payment they received on their taxes.
How to fill out Form W-9 (for 1099)
If you’re a contractor, you’ll need to fill out a W-9 form in exchange for the services you’ve rendered.
Whether you’re the business hiring or the contractor, filling out a W-9 is pretty straightforward, though it is a bit more complicated than your average W-2 form.
Here’s a quick rundown on how to fill out Form W-9:
Step 1: Enter your basic information
First, start by entering your name as shown on your tax return, your business name if different from your personal name (often the case for sole proprietorships), and what type of business entity you are.
If you’re not sure what that means, this is referring to whether you’re a sole proprietorship, LLC, trust or estate, or C/S corporation among other things.
In addition to this, you’ll also list your address. Make sure it’s whatever address you use on your personal tax return, as you want these to match up.
Lastly, jot down your requesters address if you’d like to be extra careful. It can’t hurt to document where you’ve sent this personal information to for future safety.
Step 2: Enter your tax ID
Next, you need to fill in your business’s tax identification number (or TIN). If you’re a sole proprietor, this will be your Social Security number while if you’re any other entity, this will be your employer identification number (or EIN).
If you’ve applied for your EIN and haven’t yet received it, you can still file by writing “applied for” in the spaced marked for your TIN number to be listed.
Step 3: Attest that everything you’ve entered is true and correct
Before you finish up your W-9 Form, you’ll need to certify that everything you’ve mentioned on the form is both true and correct. Assuming it is (because you can pay big fines and even jail time if it’s not) mark off on each of these statements:
- “The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me).”
- “I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.”
Confused by this one? You’re probably exempt, as the IRS will notify you if you’re not.
- “I am a U.S. citizen or other U.S. person.”
- “The FATCA code(s) entered on this form (if any) indicating that I am exempt from FATCA reporting is correct.”
In most cases, you won’t have to deal with this as it has to do with the Foreign Account Tax Compliance Act.
Conclusion
Whether you’re a business owner hiring 1099 or a contractor needing to fill out a W-9 form, knowing more about what goes into being a 1099 independent contractor is an important part of running your business.
Don’t leave any of this up to chance. Inform yourself and use that knowledge to keep things running smoothly.
