Compliance for Independent Contractors and 1099 Workers: What to Know

Independent contractors and freelancers can be a useful source of work for employers. They can help your business pick up the slack in certain areas or they can bring unique expertise without having to create a new department.

Of course, it’s important to remain compliant when your business utilizes 1099 workers. In this guide, we’ll walk you through what makes a 1099 worker, how to remain compliant, and more.

What is a 1099 Worker?

A 1099 worker is an independent contractor or freelancer that performs work for you without being an employee of your company. If you’re bringing a 1099 worker on board, you can get specialized talent and work without having to hire more employees or create a new department because you’re lacking in one area. They can also be there to help you quickly complete jobs when you’re short on hands.

Whatever you’re using a 1099 worker for, you need to make sure you have the proper paperwork. It’s a good idea to confirm your compliance with a CPA, but if you’re needing some basic information on what is required for 1099 workers, we have you covered. First, let’s talk about how they differ from your regular employees.

How Are They Different From Employees?

There are numerous factors that differentiate your 1099 works from your company employees. Let’s take a look at each separately and outline some of their primary difference:

Here are some factors that would make someone an employee:

  • They work hours and locations that you set
  • They are trained by you
  • You pay them a salary or an hourly wage
  • They are a regular part of your operations and are likely assigned to a specific department
  • Their tools and equipment are employer-issued
  • You compensate them with benefits, PTO, health care, and more
  • You are likely their sole employer
  • They have employee rights under various laws and regulations

Now, let’s compare that to 1099 workers, who could be classified based on the following factors:

  • Often set their own schedule and can work remotely unless the job calls for on-site work
  • Often contracted by more than one company
  • Provides their own tools, equipment, and training
  • Payment is usually a flat-rate or per-project negotiation
  • You do not pay them benefits
  • They are responsible for paying their own taxes

These are just a few of the differences between these two types of workers.

How to Determine Right Job Status for Workers

When you’re determining the correct job status for workers, it’s up to you as the employer to make the distinction. The IRS does not determine these distinctions for you, though there are penalties in place if you misclassify an employee or nonemployee without good reason.

Essentially, you need to break down job status as either an employee or a non-employee. The IRS does break down three different criteria to help you determine which is which:

  • Relational - This is the presence of an implied or written contract, benefits, and other factors that link an employer to an employee.
  • Financial - A wage or salary is paid.
  • Behavioral - The employer has control over how work is performed.

If someone meets all three criteria, the IRS would consider them an employee. If one of the above criteria isn’t met, they need to be classified as a non-employee – which is usually an independent contractor or freelancer.

Determining the appropriate job status for an employee is important. It determines their tax status, as well as your responsibility in relation to them. Make sure you carefully consider the above criteria when determining what tax forms an employee or non-employee should fill out for your business.

What Paperwork and Tax Forms Do You Need?

Let’s say that you’ve classified someone as a non-employee. Now it’s time to make sure you have the proper paperwork and tax forms. Here is what you’ll need for your 1099 workers:

  1. A W-9 form. This form is to be filled out by the contractor and submitted to you.
  2. A copy of the contractor’s business license, if applicable.
  3. Form 1099-NEC, Nonemployee Compensation, to report payments you’ve made of nonemployee compensation.
  4. This paperwork is all necessary if you’ve paid someone $600 or more for services provided in relation to your business.

If you’re looking for an easy way to pay 1099 employees and remain compliant, Dots can help.

Get Started With Dots Today

Dots is the ultimate payout solution, allowing you to accept and send payments through multiple processing platforms, all in one API. This makes it easier to accept payment from customers, but it also makes paying independent contractors much simpler. You can use Dots to compensate contractors both domestically and globally.

Dots also automates the onboarding of contractors, making sure you’re compliant with KYC and other compliance obligations. You can also embed 1099 and W8-BEN forms for contractor onboarding, making it simple for them to fill out and submit to you, wherever they are. You can use the dashboard to see the status of all of your contractors too.
Dots also only charges a flat fee per transaction, so you can have as many users as needed and you only have to pay when the system is actually utilized. In short, contractor payouts have never been simpler and you can always make sure you have the proper forms and paperwork from the people you work with. Ready to learn more? Schedule a demo with Dots today.