The correct classification for this kind of worker would be an independent contractor. These individuals are called "1099 employees" colloquially because they receive a Form 1099-MISC or 1099-NEC from their clients or the companies for which they perform work, detailing the income they earned during the year without any payroll deductions.
Self-Employment: Unlike W-2 employees, whose taxes are regularly withheld from their paychecks, 1099 workers are responsible for their own payroll taxes. They pay estimated taxes quarterly and are subject to self-employment tax, which covers their contributions to Social Security and Medicare.
Work Flexibility: 1099 workers often can set their hours and decide how to complete their work. This flexibility is a hallmark of the independent contractor status.
Project-Based Assignments: Many independent contractors are hired to complete specific projects. Once the project is finished, the contract with the client typically ends unless extended by mutual agreement.
No Employee Benefits: These workers do not receive benefits such as health insurance, paid leave, or retirement plans through the companies they work for.
Legal Distinctions
It's important for both companies hiring these workers and the workers themselves to understand the legal distinctions between a 1099 worker and a traditional employee.
Misclassification can lead to significant legal and financial penalties.
The IRS uses several criteria to determine whether a worker is an independent contractor or an employee. These include factors such as the level of control the employer has over the worker's schedule and method of work, the permanency of the relationship, and the nature of the work being an integral part of the business.
For the Independent Contractor
As mentioned earlier, 1099 workers must handle their taxes. They are required to pay both the employer and employee portions of Social Security and Medicare taxes. The current rate for self-employment tax is 15.3% of net earnings.
For the Employer
Companies do not withhold taxes for 1099 workers but must ensure they issue a Form 1099-NEC if they pay $600 or more to the contractor in a financial year. Properly classifying workers can help avoid costly penalties from the IRS.
Pros:
Flexibility: Many choose freelance or contract work for the flexibility it offers in terms of hours and working conditions.
Variety of Work: Contract work can provide a diverse array of projects and opportunities that might not be available in a traditional job.
Cons:
Lack of Benefits: The absence of employer-provided health insurance, retirement plans, and paid leave can be a significant downside.
Financial Instability: Income can vary dramatically from month to month, which can make financial planning challenging.
Niural helps companies hire employees and contractors in compliance with the FLSA ruling and hire contractors in over 150+ countries compliantly, with built in guidelines, alerts and assessments educating you on misclassification liability and risk. If your contractors classify as employees instead, Niural provides a seamless way to hire these team members as employees - making sure that you are hiring compliantly at all times. You can also maintain clean employment audit trails for activities such as fundraising, M&A, and proper governance.
To learn more, please email us at support@niural.com.
