In today’s professional services economy, hiring freelance workers has become an increasingly popular strategy to scale operations without incurring the costs of hiring full-time employees. However, paying contractors can prove challenging, especially if they work remotely or are located internationally. In order to understand how to pay freelancers appropriately, businesses need to familiarize themselves with the tax laws, regulations and paperwork that often come with taking on self-employed talent, starting with the 1099 form.
What Is a 1099 Employee?
A 1099 employee is someone who is self-employed and provides services to clients on a project-by-project basis. Unlike a W-2 employee who must work according to the hours, location and methods mandated by their employer, a 1099 employee has more control over their hours, location, schedule and equipment.
Many companies tend to misclassify 1099 and W-2 employees when. However, this mix-up can have costly consequences from a tax and legal perspective. Misclassifying employees as independent contractors—and vice versa—can result in fines, back taxes and other unwanted penalties from government agencies. Additionally, 1099 employees who are incorrectly classified may be denied benefits and protections that they are entitled to, such as healthcare and workers’ compensation. To avoid these risks, it’s essential for companies to understand the factors that distinguish 1099 and W-2 employees.
Payroll for 1099 Employees vs. W-2 Employees
The key difference between a W-2 and 1099 worker is their employment status. W-2 employees are considered traditional employees, which typically makes them eligible to receive overtime pay and benefits like healthcare, retirement, paid time off and unemployment. They are also subject to payroll taxes and can have their taxes withheld by employers, while freelance workers are responsible for paying their own taxes.
Because 1099 employees are classified as independent contractors, companies can simply pay them the agreed-upon amount without taking out any deductions. Businesses do not need to worry about state tax regulations except for specific circumstances, such as backup withholding due to incorrect or missing tax information or state-based employee classification rules. The main step they need to go through is submitting a 1099 form to the IRS every year to report the payments made.
How to Issue a 1099 Form
- Determine if a 1099 is required: The IRS only requires businesses to issue a 1099 form to contractors they paid $600 or more for services during the calendar year.
- Obtain the necessary information: Before issuing a 1099, companies need to obtain the contractor’s legal name, address and taxpayer identification number (TIN) via a W-9 form.
- Prepare the form: There are several different types of 1099 forms, each serving different purposes. The IRS currently requires most businesses to report non-employee compensation on form 1099-NEC. That said, other forms like the 1099-MISC may be a better option for certain companies, depending on the nature of payment.
- Submit: After completing the steps above, businesses must send and submit a copy of the form to both the contractor and IRS. The deadline for submitting 1099 forms to the IRS is January 31 following the calendar year in which the payments were made. It’s important to note that businesses must also file a 1096 form with the IRS, which summarizes the information on all of the 1099 forms they’ve issued. The deadline for filing this form is also Jan. 31.
How to Pay Freelancers Using Different Payment Methods
When deciding how to pay contractors, there are a few best practices businesses should follow to maintain a positive working relationship and ensure payments.
- Agree on payment terms upfront: Before starting any work, both the employer and freelancer should agree on the payment terms, including the payment amount, payment schedule and payment method. This agreement should be documented in a contract.
- Use a secure payment method: It’s critical to select a secure payment method to ensure that the freelancer receives their payment in a timely and safe manner. The following table includes some of the different payment methods businesses can choose from, each with their own benefits and drawbacks.
- Consider a third-party platform: Using a third-party platform to handle payroll for 1099 employees can save businesses precious time and ensure payment. Talent marketplaces, for example, often use third-party services to take on payroll responsibilities, including 1099 forms.
|– Lost or stolen checks
– Delays & longer mailing times
|-Fast, easy to use
– Not accepted by some talent
|Direct deposit & ACH
(automated clearing house)
|– Fast & secure
– Good for recurring payments
|– Requires bank information
– Time to clear payments
|– Experience to set up payroll functions
|PayPal / Online payment platforms
|– Easy to use
– Features for invoicing, recurring payments
|– High fees
– Restrictions in some countries
|– Higher risk
– Domestic & international fees
|– Payroll services included
– Accurate, timely payments
– Intermediary for disputes
|– Built-in price (marketplace cut)
How to Make Payroll for 1099 Employees Easier
As your business expands its talent resources to include remote and independent contractors, an outsourced payroll specialist can help your business keep up with growing payment responsibilities, new regulatory terrain and sophisticated accounting systems to keep your business on track.
Paro’s team of elite finance experts includes freelance payroll specialists who can take on payroll duties to help you manage and ensure payment to 1099 employees outside of your finance department.
We also make hiring fractional finance talent easier. We’ll take care of the administrative tasks (i.e., running payroll, managing timesheets, invoicing, etc.) and assisting in pay dispute mediation. Experience the benefits of hassle-free payroll with Paro’s accounting services.