1099 vs Employee: Everything You Need to Know

The workforce has two primary types of labor: employees and independent contractors - commonly referred to as a 1099. This name comes from the documentation used for IRS tax forms. Both parties have their advantages and disadvantages, which I will explain in this article. They are both relevant in the workforce today, but the 1099 is starting to gain an edge, becoming more and more viable for full-time employment.

The Main Differences

There are some key legal differences between the two which determines how the government views your work.

Employee:

• Requires a completed W-2 to become an employee, which will be used for collecting taxes for your employer to pay the government.
• An employer withholds income taxes while paying Medicare and social security taxes.
• Unemployment must be granted by an employer if the qualifications are met by an employee upon loss of work.
• Many states have “At will” employment, in which an employer can terminate the employee without any cause. In turn, an employee can “quit” without notice.
• Employees have a designated pay period and pay rate. This is done through payroll staff, often with the use of a time tracker.

1099:

• Payments of $600 and over are reported on a 1099 form in the current calendar year.
• Uses a W-9 form to collect tax information, and must do this on their own accord, compared to an employer handling a W-4.
• Independent contractors operate as their own business.
• Payments are made through invoice. The terms of the contract dictate the rate of charge, date of payment(s), and the conditions of services.

The Employee

The employee is the most traditional form of labor. They are in understanding that the management of their tax information, scheduling, and general instruction will be handled by the employer.

Advantages:

• Many corporations offer various insurances packages at a reduced cost, and companies that have 50 or more full-time employees must provide health insurance or suffer a tax penalty.
• After being granted a position or job, you’re provided with the resources and instructions for your intended work.
• Employers typically offer or provide the necessary training to their employees.

Disadvantages:

• You can be terminated at any time without reason in most states.
• You follow the traditional style of schedule, where sick days and medical leave can put you at risk of unemployment.
• Employment has been in decline, with the preference shifting towards independent contractors in many industries. This includes temporary labor.

The 1099

There are several names the 1099 goes by: independent contractor, freelancer, self-employed. These titles typically imply their approach to business.

Advantages:

• Depending on the contract, a 1099 may have the right to pursue reparations if a legal contract is unjustifiably broken.
• You are allowed subcontracting, giving you greater control over how your tasks are completed.
• Your certifications or educational background can get you the kind of projects you prefer working on.
• Freedom to choose when to work. Many 1099s are part-time.
• You have independence in your goals and have a more variable spectrum of employment.
• In some sectors, like entertainment, skill and qualification are decided less on educational background, and more on work history, portfolios, references and personal motivation.

Disadvantages:

• Requires self-motivation, and in most cases, you must bid for jobs without a guarantee of getting a contract.
• You frequently have to take on management duties while also maintaining your work.
• In some cases, clientele may jump ship, and if they weren’t under a strong binding to a contract, they may potentially get away with unpaid services.
• You are expected to already know the skills required for your job.
• You may have to pay for your own materials and resources, depending on the work.
• 1099’s typically handle their own insurance pertaining to business and health.

Current Trends

One of the most important things to note when comparing these methods of work is which one is seeing a rise in personal and financial growth. Although there are many independent contractors who make less than the median, very few full-time contractors make minimum wage or less. There are several articles showing the rise in independent contracting, and many expect it to overtake traditional employment. You can walk outside and often times see an independent at work. Uber drivers, Amazon delivery, advertisements done by contract, etc. Many offices and work environments have temporary workers. There will always be traditional employment, but as implied previously, a work environment can be a mix of both. This also leads to the question of whether someone is truly considered an independent contractor. Both forms of work are very viable today. It has more up to one’s personality to decide which is better for their own productivity and future goals. If you’ve been stuck under the thumb of an employer and wish to use your education to greater benefit, a 1099 might be the next form worth filling out.