What is a non-employee?

Non-employee, or statutory non-employee, is generally used as part of the phrase “non-employee compensation.” It refers to any individuals who are not official employees of the employer but still contribute to the business with their labor. This distinction is essential because non-employees are not entitled to the same benefits or subject to the same tax regulations as employees.

An independent contractor is the most common example of a non-employee. Other examples include vendors, consultants, and freelancers. 

What is non-employee compensation?

Non-employee compensation is money you pay to non-employees in exchange for their services. These payments may include commissions, awards for services completed, fees, and prizes. Unlike employee compensation, non-employee compensation does not include unemployment benefits, health insurance, or retirement plans. 

Example 1

You hire a freelance video editor to edit a series of promotional videos for your company. The freelancer will take your footage and assemble several finished videos for your company. For these services, the freelancer charges $5,000 upfront and an additional $5,000 at the end of the project. 

If you’re in the US, since you’re paying this freelancer more than $600 a year, you must complete a 1099-NEC form to report the payments. 

Example 2

Rather than hiring an in-house accountant, your company contracts your bookkeeping to a local accountant. The accountant charges $4,000 per month, invoiced at the start of every month, for these services. You’re only interested in three months of bookkeeping during tax season, so you’ll pay the accountant $12,000. Your business reports this $12,000 payment to the relevant tax authority. 

What is a non-employee compensation form? 

If your business hires non-employees, you’re responsible for reporting any payments you make to those workers to the IRS. The appropriate form for reporting non-employee compensation is Form 1099-NEC. 

You must fill out Form 1099 for non-employee compensation for each non-employee worker whose business paid $600 or more the year before. However, if you paid a non-employee worker less than $600 total over a year, you do not need to file Form 1099-NEC for that worker. 

Note that employers are not responsible for withholding taxes for non-employees. Unlike traditional employees, non-employees are not on your payroll and must manage their tax withholdings independently. Therefore, the employer’s only tax responsibility with non-employees is reporting the non-employee compensation on Form 1099-NEC.  

How to classify a worker: Employee vs. non-employee

An employer’s relationship with employees differs significantly from those between employers and non-employees. To follow labor laws and tax regulations, you must correctly classify each worker you hire. The IRS has provided three factors to consider that will help determine whether a worker is an employee or non-employee.

Financial control

Unlike employees, non-employees can set their own rates and terms for payment. Employees typically receive an hourly wage or salary determined by their employers’ payment structures. Non-employees have more freedom to dictate the financial terms of the agreement, such as charging per hour, per project, or with a monthly retainer fee. They can also select the payment method that works best for them. 

Behavioral control

Generally, employers have more control over their employees compared to non-employees. For example, employers can dictate when, where, and how employees work, including their tools and equipment. 

Non-employees, by contrast, have more control over how they complete their work. They can choose when and where they work as long as they fulfill their contracts. The employer typically won’t oversee the non-employee’s work, just the final product. 

Relationship to employer

Employees have a closer, more integral relationship with the employer than non-employees. While employers generally hire employees indefinitely, non-employees usually work on a more short-term, goal-focused basis. 

If a worker has a long-term relationship with the employer and their services are an integral part of the employer’s business, that suggests the worker should be classified as an employee, not an independent contractor or consultant.

When do you have to file non-employee compensation Form 1099-NEC?

The filing deadline for Form 1099-NEC is January 31, the year after you made the payments to the non-employee(s). If required to file, you must send a copy of the form to the IRS and the non-employee worker by this deadline.