What is a 1099 employee?

A 1099 employee, also known as an independent contractor, is a self-employed individual who provides services to a company or client but is not considered a regular employee of that company.

For example, a startup might hire a freelance writer as a 1099 employee to create content for their website, blog, or marketing materials. The freelance writer would work independently, using their own equipment and software, and would be paid per project or per word count. Or an agency might hire a remote virtual assistant as a 1099 employee to handle administrative tasks, such as scheduling appointments, managing emails, or data entry. The virtual assistant would work remotely, using their own equipment and software, and would be paid hourly or on a retainer basis.

Using 1099 employees can provide flexibility and cost savings for your business, as you can hire them for specific projects or during busy periods without committing to a full-time employee. However, it's crucial to classify your workers correctly and follow the legal requirements for working with independent contractors to avoid potential legal and financial issues.

What qualifies someone as a 1099 employee?

To qualify as a 1099 employee, also known as an independent contractor, an individual must meet certain criteria set forth by the Internal Revenue Service (IRS) and the Department of Labor (DOL). These criteria are designed to distinguish independent contractors from traditional W-2 employees. Here are the key factors that qualify someone as a 1099 employee:

1. Control over work: 1099 employees have a high degree of control over how they perform their work. They set their own hours, choose their own methods, and have the freedom to work for multiple clients simultaneously. The client or company hiring them typically does not have direct control over the day-to-day activities of the independent contractor.
2. Scope of work: Independent contractors are usually hired for specific projects or services, rather than being a permanent part of the company's workforce. The scope of their work is defined in a contract or agreement, which outlines the deliverables, deadlines, and compensation.
3. Tools and equipment: 1099 employees generally use their own tools, equipment, and resources to complete their work. They are responsible for their own expenses and are not reimbursed by the client or company for these costs.
4. Payment structure: Independent contractors are typically paid on a per-project basis or hourly rate, rather than receiving a regular salary or wage. They submit invoices for their work and are responsible for their own taxes, as the client or company does not withhold taxes from their payments.
5. Benefits: 1099 employees do not receive traditional employee benefits such as health insurance, paid vacation, sick leave, or retirement plans from the client or company they work for. They are responsible for obtaining their own benefits and insurance coverage.
6. Duration of the relationship: The relationship between a 1099 employee and a client or company is usually project-based or for a specific period. There is no expectation of a permanent or long-term employment relationship.

How to pay your 1099 employees?

1099 employees, or independent contractors, are often paid differently than regular employees for several reasons. One key factor is that they may be located in different countries, which can make the payment process more complex due to varying tax laws, currencies, and banking systems.

When you're working with a global team of 1099 employees, it can be a real challenge to navigate the different payment methods and ensure that everyone gets paid accurately and on time. Traditional payroll systems that are set up for auto-crediting salaries to regular employees may not be suitable or flexible enough to handle the unique needs of international contractors.

This is where platforms like Thera come in handy. Thera specializes in global payroll solutions and is designed to simplify the process of paying 1099 employees, no matter where they are located. It offers features like multi-currency support, local bank transfers, and compliance with international tax regulations. It allows you to send higher amounts to your contractors compared to many other payment platforms. This is especially useful if you're working on larger projects or with high-value contracts.

Another reason why 1099 employees are paid differently is that the administrative burden of adding them to your regular payroll system can be significant. It may require setting up new accounts, gathering additional documentation, and ensuring compliance with various legal and tax requirements. For many companies, especially startups and small businesses, this added hassle can be time-consuming and costly.

By using a dedicated platform, like Thera for paying 1099 employees, you can streamline the process and avoid the need to integrate them into your existing payroll systems. This can save you time, reduce administrative overhead, and allow you to focus on your core business activities.

How to handle tax reporting for 1099 employees?

Handling tax reporting for your 1099 employees is a crucial aspect of maintaining compliance with federal and state regulations.

The first and most important thing you need to do before engaging a 1099 employee, is to request that they complete and submit a W-9 form (Request for Taxpayer Identification Number and Certification). This form provides you with their legal name, address, and taxpayer identification number (TIN), which is either their Social Security number (SSN) or Employer Identification Number (EIN).

If you pay a 1099 employee $600 or more during the tax year, you are required to issue them a 1099-NEC (Nonemployee Compensation) form by January 31st of the following year. This form reports the total amount you paid to the contractor during the tax year. If you use a global payroll platform like Thera, they may offer assistance with generating and distributing 1099 forms.

In addition to providing 1099 forms to your contractors, you must also file copies with the IRS by January 31st. You can file electronically or by mail, depending on the number of forms you need to submit. Some global payroll platforms may handle this filing process on your behalf.

Keep accurate records of all payments made to your 1099 employees throughout the year. This includes the date, amount, and purpose of each payment. Many accounting software platforms have features that can help you track and organize this information. Retain copies of all 1099 forms and related tax documents for at least three years after the filing deadline. This will help you respond to any questions or audits from the IRS or state tax agencies.

In rare cases, if a 1099 employee fails to provide a valid TIN or if the IRS notifies you that the contractor is subject to backup withholding, you may be required to withhold a percentage of their payments and remit it to the IRS.

Minimize 1099 compliance risks by hiring contractors through thera

If managing compliance and legal aspects of working with 1099 employees seems overwhelming, onboard your independent contractors through Thera. Our global payroll platform simplifies the process by handling tax reporting, generating and filing 1099 forms, and ensuring compliance with federal, state, and international regulations.

Our user-friendly platform, competitive exchange rates, and expert support make it easy to onboard and pay contractors worldwide, saving you time and reducing the risk of non-compliance. Schedule a personalized demo here.

‍