The first thing you need to know about how to hire a 1099 employee is that, technically, there’s no such thing as a “1099 employee,” although it is a commonly used term.
It’s often used to describe an independent contractor who is engaged directly by an employer to either provide a service or work on a project. Employers who contract work with this category of consultants or gig workers are required to furnish them with an IRS 1099 form. In contrast, “W2 employees” are permanent workers hired on an ongoing basis who require W2 forms.
Referring to gig workers as “1099 employees” in the workplace isn’t accurate and could backfire. If your relationship with your 1099 contractors resembles the relationship you have with your permanent employees, you may be in violation of state and federal employment law. You may also find yourself the subject of an IRS audit.
The following guidelines should help you find the best contractors available.
When Does Hiring a ‘1099 Employee’ Make Sense?
Using contractors rather than employees can be a useful solution for a small business that is growing just fast enough to overwhelm its owners, keeping them at work well past 40 hours a week, but not quite fast enough to support hiring full-time permanent help.
Let’s say you’re a chef and, unless you’re estimating ingredient measurements, numbers aren’t your strong suit. A self-employed bookkeeper or accountant could be the magic ingredient you need. Or, maybe your bakery’s online orders aren’t where you’d like them to be and it’s time to hire a professional web site designer. You get the idea. If any of these scenarios sound familiar, it may be time to learn how to hire a ‘1099 employee’, without running afoul of the IRS or federal or state labor law.
Hiring these specialists on a contract basis can buy you and your full-time employees time to focus on core business tasks, without the added time and expense that comes with hiring permanent staff.
The Benefits of Hiring an Independent Contractor
Using a contract worker allows you to pay for work only when it’s needed and only if the work gets done. You also take on a bit less liability if you choose to end the relationship, as compared to firing an employee. These relationships also tend to come with less paperwork and less complicated tax withholding procedures.
The U.S. Department of Labor offers useful summaries of the many laws and agencies governing employment classification. In addition, laws vary from state to state and even among municipalities, but if you’re able to answer “yes” to the following questions in reference to your freelancer(s), then you’re probably in compliance:
- Do they work for more than one client?
- Do they control their hours?
- Do they work off-site?
- Are they working on a defined project with a deadline?
How to Hire a ‘1099 Employee’: The Basics
As with any job, when you’re looking to hire a ‘1099 employee’ you’ll want to craft a well-worded job description, ask relevant interview questions, and check references. The only difference is that you’ll need to emphasize the parameters of the employment relationship during each step of the hiring process, starting with the job description.
State clearly, early, and more than once in your job posting that the role is not permanent and that whoever you hire will not be an official employee. Try to describe the contractor role in more than one way. For example, your ad might include the word “contractor” or “freelance” in the job title. Then, you might include descriptions such as “freelance role” or “contract position” in the first paragraph.
You may also want to include some key soft skills in your job description that good contract workers need to have, such as the ability to work independently. You’ll also want to include popular search terms that gig workers tend to use when looking for their next project, including “freelance,” “contractor,” “flexible,” and “independent.”
Once you begin interviewing contractors, reiterate that the role is not a staff position. Ask them directly:
- Are you OK with taking on this assignment in a freelance capacity?
- Are you comfortable working independently or do you prefer to work as part of a team?
- How do you react to suggestions and constructive criticism?
How to Hire Independent Contractors You Can Trust
It’s likely that any contractor you engage will have access to some vulnerable aspects of your business. A cleaning service may be on the premises when you are not. Any freelancer working on your computer platforms can pose a cybersecurity risk. A bookkeeper or accountant will have access to details of your financial life.
Before you enter into a business relationship with a contract worker, you’ll want to check their credentials. Ask to talk to some of their other clients, check out their presence and customer reviews on social media, and consider running a background check.
Once Your 1099 Worker Begins Working for You
Before your consultant or freelancers begins working for you, make sure you determine whether you will be paying them hourly or on a per-project basis. Then, draft a contractor agreement that reflects the nature of the working relationship using words and phrases like “project-basis,” “independent contractor,” and “not an employee.” Describe the work that will be done, deadlines and the payment structure. Clarify equipment use, confidentiality and ownership rights over any intellectual property that results from the project. Finally, make sure to include a termination clause.
If you hire 1099 workers directly, rather than through an employment agency, you will need to set up the following IRS paperwork:
- W-9 form
- 1099-NEC form
Assuming you pay your contractor more than $600 in any calendar year, you will need to send a copy of the 1099-NEC to the contractor and the IRS by January 31. If you pay via a third-party service, such as a credit card or PayPal, you may need to provide a 1099-K. If you used a 1099-MISC for contractors in the past, be aware that this form is now used for other purposes.
When Is It Time to Turn Your Contractor Into an Employee?
When a function you thought would be peripheral to your core business grows beyond your original plan, it’s probably time to offer your 1099 contractor a permanent position. If the DOL, IRS, or state labor regulators have reason to believe you’re using contractors as permanent employees, you can find yourself liable for multiple penalties.
Let’s revisit our bakery scenario to illustrate: If you now own three bake shops, and as a result your contract bookkeeper is billing you for 40 hours a week, and you just found out you’re her only client, then say goodbye to that 1099 and print out a fresh W2. It’s time to offer your contractor permanent employment.
Learn How to Hire a ‘1099 Employee’ to Tackle Your Projects
If you have projects eating up your time and distracting from your core business functions, you’ll want to start looking for high-caliber contract workers to take some of that work off your plate. Here at Monster we’re ready to help. Find out how to start checking those distracting boxes off your to-do list by posting your next job with us for free.