Hiring a full-time (or part-time) employee isn’t always your best option when your company is growing. Sometimes—like when you need additional hands for one project or a particularly busy season—bringing on an independent contractor, also known as a 1099 employee in the U.S., is a better fit.
The hiring process for 1099 employees is a little different than the application and interview structure your People team likely runs. In this guide, discover how to hire 1099 employees, three best practices to get them started, and tips to stay compliant with specific tax requirements so you can bring on the best talent for your projects.
What is a 1099 worker?
A 1099 worker or employee is a self-employed individual who offers services to a company on a temporary basis. Named after the tax form given for this type of employment (a 1099-NEC), these workers partner with organizations to support a specific project or fill a role for a limited time.
A 1099 worker differs from W-2 workers, who are formally hired by an organization. W-2 employees are integrated into the team, whether they work part-time or full-time, and follow the schedules and workflows set by their employer. On the other hand, 1099 employees must be able to determine their hours and workflow. If you tell an independent contractor how, where, and when to work, they’re actually a W-2 worker who’s been misclassified.
When to hire a 1099 employee
Independent contractors are a great fit for organizations that need a fresh look at a lingering problem, a few more knowledgeable individuals working on a time-dependent project, or occasional support. They may be your best choice when you need:
- Specialized skills: A one-off project might require someone with a unique skillset not covered by your current team.
- Occasional coverage: When your organization needs a bigger workforce for a demanding project or busy season, independent contractors in your field can step in to support.
- Local support and expertise: Businesses can bring on help when entering new markets at home or abroad. For example, a company opening a branch overseas might hire a localization expert as a 1099 worker to smooth the transition.
Benefits of hiring 1099 employees
1099 employees are a great asset, bringing expertise to an organization at a critical moment. Here are some of the ways they benefit employers:
- Reduced costs: Between the labor and time invested in the hiring process and the weeks of onboarding when they aren’t productive yet, hiring traditional employees can be costly. These employees likely have benefits, such as health insurance and social welfare programs, that you’ll need to cover. Independent contractors take less time to hire, and they don’t require benefits, bonuses, or other financial incentives often given to a full-time team.
- Simplified onboarding: Because 1099 workers don’t receive benefits, there’s less paperwork when you hire them. And, since you don’t need to fully integrate them into your team, the onboarding process is shorter: Just give them the tools they need to do their job well.
- Easier tax withholding: In the United States, independent contractors are responsible for paying their own self-employment taxes, including income tax and Social Security. This means People teams don’t have to worry about withholding the correct independent contractor taxes, which simplifies the payroll process.
Hiring a 1099 employee in 3 steps
Temporarily adding talent to your team takes less work on your end than running a full hiring process: There are fewer interviews (if any), and you won’t need to make a perfect cultural fit if they won’t be interacting with the team on a regular basis.
Here’s a three-step guide to effectively hiring 1099 employees.
1. Verify that you’re hiring the right kind of worker
An essential step before posting the job description to a hiring board, social media, or your website is confirming whether you truly need a 1099 worker. Misclassifying workers comes with heavy fines and potential legal consequences. Here are the core differences between the two:
- Behavioral control: If a manager sets a new hire’s hours and determines their way of working, this worker is an employee, and your organization risks misclassification by calling them a contractor. 1099 workers must have freedom to complete work in their own way.
- Payroll: A company pays 1099 workers from invoices at an agreed-upon rate. The organization can’t withhold taxes or offer the independent contractor benefits like a traditional employee, no matter how skilled they are.
- Contract breaches: Your organization will enter a contract agreement with a 1099 employee like those for the rest of your team. But it’s a different type of contract—one that spells out exactly the scope of the role rather than general terms of employment—and you’ll need to be careful not to overextend the limits. Asking the person to perform out-of-scope tasks or keeping them on the team after the project’s completion are generally breaches of contract that push them into traditional employee status.
Some contractors may want to start as a 1099 worker and move into a more permanent role in your organization. If that’s a possibility, state it outright in the job description.
2. Find the perfect fit
To recruit a contract worker with the right profile for the project, make sure your People team knows the specific skillset you need (like a software developer who knows a certain coding language). If you have a set budget, research how much the average candidate charges for similar roles. They may charge a fixed fee or hourly wage, or use other metrics to determine wages like pay per word.
Once People Ops has identified strong candidates, set up a brief meeting with the prospect to verify their qualifications, check their cultural fit, and discuss their availability and rate. Unlike employees, freelancers often participate in several projects with different companies at once and may only have a few hours per week to dedicate to a new one.
You may want to ask the candidate for references (ideally from past clients). It’s not as common to collect references for 1099 workers, since most contract work is short-term and some online platforms let past clients leave public reviews for their work. But asking for references can help your People team learn more about the person’s behavior on the job, and you’ll know you’re getting a good fit for your current needs.
3. Extend a 1099 contract
Contracts for 1099 workers should clearly state the scope and duration of the engagement. In it, you’ll need to describe the tasks the contractor will perform and any key deadlines. You’ll also want to define quality standards so the contractor knows what the company deems an acceptable deliverable.
The contract should also include agreed-upon information about payment, like the amount and cadence. It might be useful to slip a reminder in this part of the contract that the company isn’t responsible for withholding taxes on the contractor’s behalf, nor are they eligible for employee benefits.
What to do after hiring a 1099 employee: 3 tasks
Once the new contractor has reviewed and signed their contract, your People team must complete the onboarding process. Since 1099 employees don’t legally function like W-2 employees, the onboarding process looks quite different (in ways that are easier on your team).
1. Fill out the proper tax form for 1099 employees
What paperwork do you need for a 1099 employee? Finding the answer may not seem straightforward the first time you hire a non-traditional employee. After all, you can’t just collect the documentation you’re used to getting from W-2 employees.
Luckily, you can start with a familiar tax form. Every region around the world has different rules and tax forms, but in the U.S., every worker must fill out a Form W-9. This IRS form provides the company with information like the employee’s Social Security number and address. Your People team needs the Form W-9 data to report contractor payments to the IRS.
When tax season rolls around, your organization will need to file a 1099-NEC form for the independent contractor. This form has two parts: Copy A and Copy B. Send 1099-NEC Copy A to the IRS for any independent contractor who earned over $600 in the previous tax year. This way, the IRS knows how much that worker earned. Give the contractor 1099-NEC Copy B so they know how much they earned for their records and tax payments.
1099-NEC and 1099-MISC are different forms, so be sure your People team fills out the right one. The latter is a form covering miscellaneous non-employee payments, like prizes or legal settlements.
2. Set up payments for the contractor
After you’ve gathered the independent contractor’s IRS tax information with the Form W-9, collect their banking information. Have the new contractor securely send you their account and routing numbers to plug into your direct deposit platform. If they don’t want to receive direct deposits, discuss other potential payment methods, such as physical checks, if it’s a viable option for your organization.
3. Collect and pay invoices
Determining how to pay 1099 employees is simple. Unless a contractor receives a fixed-fee payment from your company, they’ll send invoices for the work performed. You may want to ask them to itemize these invoices, detailing the hours they worked or deliverables they completed, so you can check them against your records. When you’re confident the invoice is accurate, initiate payment. A major complaint from independent contractors is a lack of timely pay, so prompt payment can boost your reputation.
Be sure to keep an organized record of all payments. This documentation comes in handy for IRS tax compliance purposes and payment disputes, and it gives you a more accurate budget for contractor costs when you need support in the future.
Hire and pay compliantly across the globe with Oyster
Not complying with the correct classification for new hires can mean serious fines and legal consequences for your business, which is more of a risk with independent contractors than W-2 employees. And if you’re hiring somewhere other than your home country, there are even more hoops to jump through and new laws to interpret. Avoid the headaches by working with Oyster.
Oyster helps employers hire top talent in over 180 countries by automating everything from contracts to payroll. Get Oyster’s expert support for hiring global contractors, from compliant contracts to misclassification protection and more.
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About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
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