Independent contractors are now becoming the employees of choice. Almost 40% of the US workforce now earns at least 40% of their total income through gig work. As the gig economy grows, companies may prefer to hire independent contractors over full-time employees. This is because employers can hire independent contractors temporarily and save money by not offering them traditional employee benefits such as health insurance, paid vacations, maternity leave, or 401(k) contributions.
Employers hiring independent contractors must categorize them correctly to avoid employee misclassification hassles. The Internal Revenue Service (IRS), the Department of Labor (DOL), and states consider different factors when evaluating the status of a professional to classify them as an employee or an independent contractor. Unfortunately, the interpretation may be contradictory because organizations and governments have different sets of criteria.
Read this article to know more about independent contractor rights and avoid confusing them with employee benefits.
Who is a 1099 Employee?
A 1099 worker is a self-employed individual. The phrase comes from the 1099 tax form employers must fill (1099-MISC or 1099-NEC). Usually, companies have two hiring categories – internal hires managed by the company and external hires over which the company (client) has minimal control.
Clients who employ externally pay only for the job, excluding benefits and deductions. This employee, often known as an independent contractor or freelancer, is exempt from traditional employment classification standards.
These professionals, known as 1099 employees, typically opt for specific jobs that come under freelancing. However, thanks to digitalization, many occupations have now become freelance or contract-based jobs. For example, today, web designers and content writers are often classified under 1099 laws.
What are the Classification Rules for a 1099 Employee?
Employee classification is crucial for understanding the application of 1099 employee rights.
Your workforce can be classified under several categories based on multiple determining factors. The seven core employee categories include:
- Independent Contractor
Understanding the criterion behind these classifications can help you find relevant employees that fulfill your goals. Furthermore, you must be aware of the 1099 classification rules.
The 1099 employee rights and the 1099 laws apply to independent contractors. A freelancer or independent contractor works on a contractual basis with an organization. However, they are not a part of the company’s payroll. Freelance writers, graphic designers, rideshare drivers, food delivery people, etc., are examples of independent contractors.
Independent contractors are exempt from 1099 employee rights because their working hours depend upon the work contract. Also, their income depends on the job requirements, contract terms and the duration of the project.
Different industries and companies have a separate budget allocated for different employee categories. Therefore, the employee pay depends on the industry standards and the company they choose to work with. Hence, independent contractors are not treated as corporate workers, as their company benefits are not generally guaranteed.
What happens if you misclassify an employee?
There are several consequences of employee misclassification. In such a scenario, tax authorities may conclude that the company owes income and payroll taxes for the period they misclassified the employee. This might amount to a large sum. Furthermore, tax authorities or other regulatory bodies may heavily fine or penalize a company. This particularly happens if authorities suspect the company of misclassifying its employees on purpose.
Individuals who have been misclassified may file a lawsuit against a firm, as per the local labor laws. If a court decides the company is liable for any loss or damages, it may order the company to offer adequate compensation to the employees.
Legal Rights of 1099 Employees
The 1099 employee rights are fundamental for independent contractors. The following
1099 laws protect the rights of freelancers/independent contractors:
The client has no control over an independent contractor’s work; they can’t dictate when, where, or how to do their job. These are the core tenets of independent contracting, and if a client tries to gain control, they might be charged with treating the contractor as an employee.
Usually, the client is supposed to hire independent contractors when the internal team cannot execute the task. However, if they make contractors perform the duties of a W-2 employee, it will be regarded as employee misclassification.
Independent contractors enjoy the freedom to work from anywhere they want, provided they can complete their projects remotely. This implies that they must arrange all the required tools by themselves, like internet connection, home office, etc. An influencing factor in choosing to work as an independent contractor is having control over the work hours and the pay.
A contract refers to the legal agreement between two parties. Hence, both parties must sign the contract before the work begins. It should clearly define the contractor’s job, the project duration, pay, work hours, termination terms, etc.
Market their services
When a person works as an independent contractor, they can connect with multiple employers on various freelance platforms. They can work with multiple clients and set deliverables accordingly. This holds true even if they have a long-term contract with one company. For marketing their services, independent contractors may print business cards, pamphlets, and handouts.
Work with other contractors
As an independent contractor, you can hire subcontractors or other freelancers to help you complete specific tasks of your projects. However, they must advise/inform the client if they intend to use additional resources for project completion, to maintain transparency.
Employees in an organization have a fixed payment cycle, whether biweekly or monthly. They receive their paycheck, including their gross salary (net pay and relevant deductions). However, for independent contractors, the payment schedule must be decided by both parties and included in the contract along with the payment specifications (online, wire transfers, checks, etc).
Challenge their employment status
The work contract defines the job/responsibilities of an independent contractor. However, the Internal Revenue Service (IRS) and the Labor Department (and state authorities) utilize their unique criteria to evaluate whether an individual is an employee or a contractor. Independent contractors can challenge their status as defined by any authority by consulting with an attorney.
Manage their business
Independent contractors can manage their business/services as mandated by the 1099 employment laws. However, they must remain informed about their tax obligations – they must pay self-employment (SE) tax themselves, covering both the employer and employee portions of Social Security and Medicare (FICA). Clients are not liable to deduct or pay taxes on behalf of independent contractors. Thus, they must file a Form 1099-MISC at the end of each fiscal year.
Both clients and independent contractors must learn about the 1099 employee rights to ensure total compliance and avoid legal complications.
Rights Not Covered in the 1099 Contractor Laws
The 1099 laws do not cover many rights pertaining to independent contractors, including:
Payroll taxes are not deducted from contractor payments. As a sole proprietor, an independent contractor must monitor and pay both federal and state taxes. Hiring companies need not pay Medicare or Social Security taxes.
Overtime pays and minimum wage
Every state is obligated by federal law to pay full-time employees a minimum wage and overtime pay. However, this does not apply to contractors as their fee is established after negotiations with the client and included in their project contract. Freelancers are exempt from hourly wage laws.
Workers’ compensation and unemployment benefits
If an independent contractor is sick or injured, they are not entitled to compensation or unemployment benefits from their employers under the 1099 laws. They are also not eligible for unemployment benefits. However, freelance contractors can contribute to a state compensation fund separately.
While labor laws govern employer-employee relationships, the most crucial document for independent contractors is a signed contract. This contract outlines all work-related details, safeguarding the freelancer’s rights and long-term interests.
Employers hiring independent contractors must draft agreements in compliance with the 1099 employee rights. Since this can be a complex and overwhelming task, organizations can partner with a global PEO-EOR firm like Multiplier. Our digital platform helps you manage independent contractors and international employees effectively. In addition, we can also help you with employee onboarding, contracts management, international payroll, benefits & compensation, and much more.
Connect with us for more insights regarding 1099 employee rights and what you should do to avoid hefty fines and legal issues.
Q. How are payroll taxes treated for contractors?
No payroll taxes are deducted for contractors.
Q. Are contractors paid a fixed amount?
Contractors generally have different amounts for different projects.
Q. Do 1099 laws apply to independent contractors?
Yes, all of the 1099 laws are applicable to independent contractors.