If you’re thinking about hiring a 1099 employee, you’re not alone. The number of independent contractors, often called freelancers or gig workers, has grown rapidly in recent years. In fact, over 64 million freelancers now work in the U.S., making up about 38% of the entire workforce.

However, despite how often people say “1099 employee,” the term is technically inaccurate. A worker paid with Form 1099-NEC is legally an independent contractor, not an employee. That distinction matters for compliance, avoiding penalties, and building the right working relationship.

This guide explains what a 1099 worker is, how they differ from W-2 employees, and what employers need to know before hiring one.

What Is a 1099 Employee?

A 1099 worker is someone you hire as an independent contractor rather than a regular employee. Instead of joining your payroll, they operate as their own business. That means they decide how and when to do the work, bring their own tools or methods, and often juggle multiple clients at once.

From your perspective as an employer, the main difference is in how you pay them. You don’t withhold income taxes, Social Security, or Medicare the way you do for W-2 employees. Instead, you pay the full amount you agreed upon, and at the end of the year, you issue Form 1099-NEC if they’ve earned at least $600.

This arrangement gives your business more flexibility, but it also puts the responsibility on you to classify the worker correctly. Classifying someone incorrectly can lead to financial and legal consequences.

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What Are the Key Differences Between 1099 and W-2 Workers?

Once you understand that a 1099 worker is really an independent contractor, the next question is how they compare to a traditional W-2 employee. The distinction goes beyond taxes; it shapes the entire working relationship. Knowing these differences upfront helps you avoid costly mistakes and decide which type of worker best fits your business needs.

Employment Status

The biggest difference starts with how each worker is classified.

• 1099 Worker: Not considered a formal employee of your company. Instead, they operate as their own business—often as a sole proprietorship or LLC. You bring them in to complete specific projects or services, but they remain independent.
• W-2 Employee: Recognized as an official employee of your business. That means you set their schedule, define their role, and provide ongoing oversight. They are fully part of your workforce and covered by employment laws.

In practice, a 1099 contractor functions more like an outside business partner, while a W-2 employee is fully integrated into your team.

Control and Direction

Another key difference lies in who decides how the work gets done.

• 1099 Worker: Has greater autonomy and control over their schedule, methods, and tools. They choose which projects to accept and how to complete them, and they often work for multiple clients at the same time.
• W-2 Employee: Works under the direction of the employer. The company sets its hours, assigns tasks, and expects them to follow established procedures and training.

This difference in control is one of the biggest markers the IRS looks at when determining worker status. If you tell someone when, where, and how to work, they’re likely a W-2 employee, not a contractor.

Taxes and Withholding

Taxes are where the difference between 1099 and W-2 workers really shows up.

• 1099 Worker: Independent contractors handle their own taxes. They must pay federal, state, and self-employment taxes, which are 15.3%(12.4% for Social Security and 2.9% for Medicare), typically through quarterly estimated payments. The upside is that they can deduct eligible business expenses—like equipment or a home office—to reduce their taxable income.
• W-2 Employee: Has taxes withheld directly from each paycheck by the employer, including federal income tax, state income tax (if applicable), and FICA contributions (Social Security and Medicare). Employees are only responsible for their portion of Social Security and Medicare, while the employer pays the other half. At the end of the year, they receive a W-2 form summarizing wages and withholdings.

For business owners, this difference is crucial: hiring a W-2 employee means handling tax withholdings and employer contributions, while hiring a 1099 worker shifts that entire responsibility to the contractor.

Business Expenses

When you hire a 1099 worker, you don’t cover their day-to-day costs the way you would for an employee.

• 1099 Worker: Pays for their own equipment, software, or supplies. The advantage is they can write off these costs on their taxes. For example, a freelance designer can write off design software, internet service, or even part of their home office.
• W-2 Employee: Typically doesn’t cover these expenses themselves. If a job requires specific tools or travel, the employer is responsible for providing or reimbursing them.

For employers, this arrangement often results in lower overall costs. Just remember that because they supply their own tools and methods, you’ll have less control over how the work gets done than a W-2 employee.

What Qualifies a Worker as 1099?

Before you label someone a contractor, it’s important to know how the IRS defines a 1099 worker. To be classified correctly, the worker must meet specific IRS guidelines for worker status. These rules focus on how much control you, as the employer, have over the person’s work, finances, and relationship with your business.

Let’s break down the three key tests the IRS uses to make that determination.

Behavioral Control Test

The first factor the IRS considers is behavioral control, which is how much influence you, as the employer, have over what the worker does and how they do it. To see where your situation falls, ask yourself:

• Does my company provide instructions on what tasks must be done and how they should be completed?
• Does the company decide when and where the work must take place?
• Does the company dictate what tools or equipment the worker must use?
• Does the company require the worker to purchase supplies from specific sources?

If you answer yes to most of these, the IRS will likely consider the worker a W-2 employee rather than a 1099 contractor.

Financial Control Test

The IRS also looks at financial control, how much say the worker has over their own business decisions and finances. This factor helps determine whether the person is truly independent or tied closely to your company. Ask yourself:

• Does the worker invest in their own equipment, tools, or workspace?
• Can the worker take on financial risk, such as the chance of losing money on a project?
• Is the worker free to offer their services to other clients at the same time?
• Does the worker decide how they get paid—by the project, by the hour, or another method?
• Can the worker increase profits by managing expenses efficiently?

If the worker manages their own financial decisions and risks, the IRS is more likely to view them as a 1099 contractor. If not, they’re probably an employee.

Relationship of the Parties

The final factor the IRS considers is the relationship between your business and the worker. This focuses on how the work is structured and whether it looks more like an ongoing employment relationship. Ask yourself:

• Is there a written contract that clearly defines the worker as an independent contractor?
• Does the worker receive benefits typically reserved for employees, such as health insurance, retirement plans, or paid vacation?
• Is the working relationship expected to continue indefinitely, rather than ending after a project is completed?
• Is the work being performed a core part of your business operations?

If the relationship looks and feels like long-term employment with benefits, the IRS is more likely to classify the worker as a W-2 employee rather than a 1099 contractor.

What happens if my company misclassifies a 1099 worker?

Even with the IRS tests in mind, some businesses mistakenly label employees as contractors. This misclassification creates problems for both workers and employers.

For workers, misclassification means losing out on protections and benefits. They don’t receive unemployment insurance, employer-paid Social Security and Medicare contributions, or access to benefits like health insurance and paid leave. 

For businesses, misclassification can lead to significant liability, including back taxes and penalties.

What are the penalties for misclassifying a 1099 worker?

When a worker is misclassified, the IRS may hold the business liable for:

• Income tax withholdings that should have been deducted from paychecks
• Social Security and Medicare contributions (employer and employee portions)
• Unemployment taxes at the federal and state levels

Workers who believe they’ve been misclassified can ask the IRS to review their status. If the IRS decides they should have been treated as employees, those workers can file Form 8919 to report their share of Social Security and Medicare taxes that should have been withheld.

Legal Cases and Enforcement

The IRS and Department of Labor don’t just issue guidelines; they actively enforce them. Companies that misclassify workers risk lawsuits, fines, and costly judgments.

For example, after an investigation by the U.S. Department of Labor’s Wage and Hour Division, the government filed suit against San Juan–based Optimus Service Group LLC and its principal, Jorge Rivera Berrios, for misclassifying at least 254 security guards as independent contractors. The complaint alleged the company:

• Failed to pay overtime rates required under the Fair Labor Standards Act (FLSA)
• Misclassified guards as independent contractors to avoid tax and wage obligations
• Did not maintain accurate records of hours, wages, and working conditions

The Department of Labor is seeking back wages, liquidated damages, and injunctive relief to prevent future violations.

How to Hire a 1099 Worker?

Hiring an independent contractor requires more than just agreeing on a rate. To protect your business and stay compliant, there are a few key steps you need to follow before work begins. 

Step 1: Collecting Form W-9

Before paying a contractor, request a completed Form W-9. This form provides their name, business name (if applicable), address, and taxpayer identification number (TIN or SSN). You’ll use this information to prepare Form 1099-NEC at year’s end. Keep the W-9 on file—it’s part of your compliance record.

Step 2: Creating a Written Contract

Put everything in writing. Your contract should outline the scope of work, deliverables, payment terms, deadlines, and confirm that the worker is an independent contractor, not an employee. This protects you legally and sets clear expectations.

Step 3: Setting Payment Terms

Decide how and when the contractor will be paid. Common options include hourly rates, per-project fees, milestone payments, or monthly invoicing. Be clear about invoicing procedures and payment schedules to avoid disputes.

Step 4: Filing Form 1099-NEC

If you pay a contractor $600 or more during the year, you must file Form 1099-NEC. Provide a copy to the contractor and send one to the IRS by January 31. Good recordkeeping throughout the year makes this step much easier.

Step 5: Keep Clean Records

Maintain copies of contracts, invoices, W-9s, and proof of payment for every contractor. If the IRS ever audits your business, having detailed records will help you prove compliance and avoid penalties.

How does Payment Work for 1099 Workers?

Paying independent contractors looks very different from running payroll for W-2 employees. Instead of hourly wages with tax withholdings, contractors are typically paid based on invoices, project terms, or agreed schedules. As the employer, you don’t handle tax withholdings or benefits; you pay the full amount owed, and the contractor manages their own taxes.

In this section, we’ll cover how payment arrangements are set up, the methods you can use to pay contractors, how tools like OnTheClock can help, and what year-end reporting looks like with Form 1099-NEC.

Contract Terms and Invoicing

When hiring a 1099 worker, payment starts with a written contract. The contract should outline exactly what work is being done, how much it will cost, and when payment is due. This protects both you and the contractor by setting clear expectations from the start.

Most contractors bill through invoices, which detail the services provided, the rate, and the total amount owed. Invoices may be issued per project, on a milestone basis, or monthly, depending on the arrangement. Unlike payroll, you don’t withhold taxes from these payments; the contractor is responsible for handling their own tax obligations.

Payment Methods and Schedules

Once the contract and invoicing process are in place, the next step is deciding how and when to pay your 1099 workers. Unlike employees, contractors aren’t tied to a set payroll cycle—you can set payment terms that fit the project and your business needs.

Common payment methods include:

• ACH transfers or direct deposit: Fast, secure, and easy to track.
• Paper checks: These are still used by some businesses, though they are slower and less convenient.
• Online payment platforms (PayPal, Stripe, etc.): Useful for remote or international contractors, though fees may apply.

The key is to agree on the method and schedule in writing before work begins. This keeps expectations clear and helps build trust with the contractor.

How do you Pay 1099 Workers with OnTheClock?

If you pay contractors by the hour, you can easily integrate them into your existing payroll process using OnTheClock. This makes it simple to track their hours alongside your W-2 employees while still treating them as independent contractors for tax purposes.

Here’s how it works:

1. Add the contractor to OnTheClock just like you would an employee, but mark them as a 1099 worker in the system.

2. Track their hours using the same tools your employees use—clock-ins, mobile tracking, or project-based logging.
3. Approve their time at the end of the pay period to confirm accuracy.
4. Export their hours to payroll so you can process payment quickly and consistently.
5. Issue payment directly through OnTheClock Payroll. The system ensures contractors are paid accurately, without tax withholdings, since they handle their own.

By using OnTheClock Payroll, you streamline payments for both employees and contractors, reduce errors, and keep your records clean for year-end reporting.

Form 1099 Reporting

At the end of the year, you’re required to report payments made to independent contractors using Form 1099 (Nonemployee Compensation). This form is issued to any contractor you paid $600 or more during the calendar year.

As the hiring business, you must:

• Prepare and send Form 1099 to each contractor by January 31 of the following year.
• File a copy with the IRS (and with your state, if required) by the same deadline.
• Keep accurate records of payments and invoices throughout the year to make the filing process easier.

The form shows the total amount you paid the contractor, but unlike a W-2, it doesn’t list tax withholdings. The contractor uses it to report their own income and calculate self-employment taxes.

By tracking hours and payments through a system like OnTheClock, you’ll have the records you need ready for accurate reporting. OnTheClock also generates a 1099 report for each contractor, making compliance even simpler and reducing the chance of costly errors.

What are the Pros and Cons of Hiring 1099 Workers?

Hiring independent contractors can be a smart move, but it isn’t the right fit for every situation. Understanding the pros and cons helps you weigh the flexibility and cost savings against the risks and limitations.

What Are the Pros of Hiring a 1099 Worker for Employers?

Hiring 1099 workers offers several advantages that can help small businesses stay lean and flexible:

• Lower costs: No payroll taxes, health insurance, retirement contributions, or paid leave to cover.
• Reduced overhead: Contractors handle their own insurance, licenses, and compliance, which lightens your administrative load.
• Scalability: Bring contractors on quickly for projects or busy periods, and scale back when demand slows.
• Access to expertise: Contractors often bring specialized skills you may not have in-house, allowing you to fill gaps without a permanent hire.
• Faster onboarding: Most contractors can start immediately and need minimal training, which saves time.

What Are the Cons of Hiring a 1099 Worker for Employers?

While contractors offer flexibility, there are trade-offs that employers need to consider:

• Less control: You can’t dictate how, when, or where contractors complete their work the way you can with employees.
• Compliance risks: Misclassification errors can lead to back taxes, penalties, and legal disputes.
• No long-term stability: Contractors may move on quickly or take on other clients, which can disrupt projects.
• Limited loyalty: Since they’re not part of your employee team, contractors may be less invested in your company’s long-term goals.
• Integration challenges: Contractors may not always fit smoothly into existing workflows or company culture.

What are the Pros of being a 1099 Worker?

From the worker’s perspective, choosing 1099 contracts can bring major benefits:

• Flexibility: Freedom to set their own schedule and choose projects.
• Autonomy: Control over how the work is done, using their own tools and methods.
• Earning potential: Ability to take on multiple clients or charge higher rates for specialized skills.
• Tax deductions: They can reduce taxable income by writing off business-related costs such as equipment, travel, or home office expenses.
• Variety of work: Opportunities to work across industries and build diverse experience.

What are the Cons for Workers of being a 1099 Worker? 

Contracting also comes with challenges that traditional employees don’t face:

• No benefits: No health insurance, paid leave, or retirement contributions from an employer.
• Higher tax burden: Must pay the full 15.3% self-employment tax and make quarterly estimated tax payments.
• Income instability: Work may be inconsistent, with dry periods between projects.
• No job security: Contracts are often short-term and can end suddenly.
• Added responsibilities: Contractors must handle their own insurance, licenses, and compliance paperwork.

Final Thoughts: Why Correct Classification Matters

Classifying workers correctly isn’t just a box to check—it’s a decision that shapes your business’s financial health, compliance, and long-term success. Independent contractors can give you flexibility, specialized skills, and cost savings, but only if you engage them the right way and stay compliant with IRS rules.

Bottom line: evaluate each worker’s role carefully. If you’re unsure, consult a tax or legal professional before making the hire. Doing it right up front is always less expensive than fixing mistakes later.