1099 Employees: What to Know to Stay Compliant

You need someone with a very specific skill set. Maybe it’s a web developer who knows that niche programming language your project requires. Or a marketing strategist who’s worked in your exact industry before. And you need them now—not in three months after a lengthy hiring process.

So you think—contractor. They can jump in, get the work done, and you don’t have to worry about benefits, vacation days, or finding them a permanent desk. Simple, right?

Well, not exactly. If you get the classification wrong with 1099 contractors, you could be looking at back taxes, penalties, and a very unhappy conversation with the IRS. Because the line between contractor and employee isn’t always as clear as you’d think.

Whether you call them contractors, freelancers, or 1099 employees, the rules are the same. And those rules matter more than you might realize—especially if you’re hiring across state lines or thinking about going global.

What is a 1099 employee?

A 1099 employee is basically a contractor, freelancer, or specialist you hire in the U.S. without bringing them onto your payroll as a regular employee. Think of that graphic designer who creates your new website, the marketing consultant who helps launch your product in a new market, or the developer who builds that custom feature your team doesn’t have time for.

Companies work with 1099 contractors when they need specific expertise fast, want to test new markets without committing to full-time hires, or have project-based work that doesn’t justify adding someone permanently to the team.

The “1099” part comes from the tax form you’ll file at the end of the year—it’s how you report to the IRS what you paid that contractor. Unlike your regular employees who get W-2 forms, contractors get 1099s.

You’ll find 1099 contractors in pretty much every industry and role you can think of. Marketing specialists, writers, web developers, sales consultants, customer service reps, HR advisors, accountants, bookkeepers—the list goes on. If there’s specialized work to be done, there’s probably a contractor out there who can do it.

1099 vs. W-2 employee

While a 1099 employee is a contractor, a W-2 employee, or a common-law employee, is a U.S. worker who is part of a traditional employer-employee relationship: you control the work the W-2 employee performs and how they complete it.

Several factors differentiate a 1099 contract position and a W-2 employee from each other. The primary difference is that 1099 employees generally do not receive the same entitlements and protections as W-2 employees under local labor laws.

Contractors must pay their income taxes and contributions, while you automatically deduct taxes from a W-2 employee’s paycheck. A full-time employee uses Form W-2, while a contractor uses Form 1099-NEC to file taxes.

Some other key differences between contractors and W-2 employees include the following:

Hiring 1099 employees: pros and cons

There are advantages and disadvantages to hiring a 1099 employee. We discuss some of these pros and cons below.

Pros to hiring 1099 employees

1099 employees offer many benefits for companies seeking to quickly expand their capabilities. Some key benefits to engaging 1099 employees include the following:

• Access to a broader talent pool. Companies can hire talent with the most relevant skills and expertise for their specific needs, regardless of the contractor’s location.
• Entry into foreign markets. Global companies can quickly test new markets for expansion and gain valuable local knowledge and connections by engaging international contractors.
• Quick and easy onboarding. Contractors do not require extensive training, onboarding, or payroll associated with long-term employee investment.
• Workforce scalability. Contractors allow employers to grow or reduce their workforce as needed, and they can quickly scale up teams during peak periods and downscale during slower times.
• Flexible commitment. Companies can easily engage contractors for short-term projects and seamlessly discontinue the relationship upon completion.
• Cost savings. You don’t have to pay for all the extras that full-time employees require: long-term salaries and benefits like health insurance and retirement contributions.

Cons to hiring 1099 employees

• Limited control. Contractors work autonomously by managing their projects and timelines, which makes it more difficult for you to control their work.
• Difficulty finding top talent. Due to the lack of benefits and work stability in a contractor relationship, you may have a hard time securing and retaining top talent.
• Temporary workforce. A contractor’s temporary nature and ability to work with multiple clients limit their overall investment in your company’s goals and helping with its long-term growth.
• Workflow disruptions. Engaging contractors for short-term projects can mean lots of turnover and disruptions, as they may not always be available for ongoing needs.
• Increased liability. Contractors do not have certain employee protections, such as workers’ compensation, and may sue their clients for work-related injuries.
• Loss of copyright ownership. Unless explicitly defined in the contract, contractors keep copyright ownership of their work and may increase the risk of sharing sensitive company information.
• Misclassification risks. If you misclassify your talent—even unintentionally—you could face severe risks and liabilities, including unpaid taxes, back benefits, legal fines, and reputational damage.

Read more: The Pros and Cons of Hiring Independent Contractors

Engaging contractors: 1099 rules for employers

The IRS doesn’t care what you call someone. They care about the actual working relationship. And they’ve got three tests they use to figure out whether that “contractor” you hired is really an employee in disguise.

Behavioral control: Who’s calling the shots?

If you’re telling someone when to work, where to work, what tools to use, and exactly how to do the job, you’re probably looking at an employee. Real contractors control their own methods and schedules. You can say “we need this website built with these features by March 15th,” but you can’t say “work from 9 to 5 using our computers and follow our step-by-step process.”

Financial control: Who handles the business side?

Employees get steady paychecks and company benefits. Contractors submit invoices, handle their own taxes, and often work for multiple clients. If you’re providing equipment, covering expenses, or offering benefits, the IRS starts wondering why you’re not just calling them an employee.

Type of relationship: What does this really look like?

This one’s about the bigger picture. Is this ongoing work that’s central to your business? Are you offering employee-style benefits? Does your contract spell out that this is truly independent work? The IRS looks at the whole relationship, not just what you wrote in your agreement.

Set yourself up for success from day one

Once you’ve determined someone really should be a contractor, don’t wing it. Create a written agreement that clearly defines the relationship, sets expectations for deliverables (not hours), and establishes payment terms. Make sure they’re handling their own taxes and using their own tools when possible.

Because when classification goes wrong, you’re not just paying penalties—you’re paying back taxes and benefits you should have provided all along.

What contractors can expect

When you hire a 1099 contractor, you’re not just getting someone to do work. You’re entering into a business relationship with someone who has their own rights and responsibilities. Here’s what that looks like:

They control their own work process

Real contractors decide how to get the job done. They bring their own expertise, tools, and methods to the table. You can’t hand them a company laptop and tell them to work from your office using your preferred software. They’re running their own operation, which means they handle their own training, equipment, and work style.

Everything needs to be in writing

A handshake deal isn’t going to cut it. You need a written contract that spells out exactly what work they’re doing, when it needs to be done, how much you’re paying, and how either of you can end the relationship. Think of it as protecting both of you when expectations get fuzzy later.

They’re running their own business

Contractors pay their own self-employment taxes, handle their own benefits, and don’t get vacation days or health insurance from you. They’re essentially a small business that you’re hiring for specific work. This also means they can write off business expenses and manage their finances however they see fit.

They can work for your competitors

Unless you’ve got a specific non-compete agreement (and even those have limits), contractors can work for anyone they want. That marketing specialist helping you might also be working with companies in your industry. It’s part of the trade-off for getting their expertise without a full-time commitment.

They can bring in help

Contractors can subcontract work to other people or bring in partners to help complete projects. You’re hiring them to deliver results, not to personally do every single task themselves.

Payment should be straightforward

Contractors submit invoices and expect to get paid according to your agreement. No paystubs, no automatic deductions—just payment for services delivered. Make sure your contract is clear about rates, timing, and what triggers payment.

How to pay 1099 employees

1099 employees don’t have a fixed salary and are not on your payroll. Your business and a 1099 employee must establish a pay rate, frequency, and payment method in the contractor agreement.

Typically, the contractor sends an invoice for their hourly or project-based work, and you pay the 1099 employee by providing a paycheck. You do not withhold income taxes from the 1099 employee’s paycheck.

Consider these steps when paying 1099 employees:

• Determine payment structure
• Collect needed information, such as the worker’s Tax Identification Number (TIN) and W-9 form
• Write a contractor agreement that establishes the scope of work, payment details, and other necessary information
• Process payments according to the agreed-upon payment structure and schedule

When to hire 1099 employees vs. W-2 employees

Determining whether to hire a 1099 employee or a W-2 employee contractor depends on numerous factors. Consider your budget, what kind of work you need, the job duration, and how much collaboration you require from them.

Reasons to choose contractors over full-time employees:

• Short-term assignments. When you need someone with specific expertise or knowledge to work on a short-term project or assignment.
• Save on costs. When you want to cut costs and resources associated with hiring full-time employees, such as payroll tax, statutory benefits and contributions, work equipment, and ongoing career development and training.
• Enter new markets. Global companies interested in expanding into the U.S. can hire 1099 employees directly for market insights without spending time, money, and resources on entity establishment.

Read more: Should You Hire a Contractor or an Employee?

1099 employee FAQs

Can contractors work full-time hours for you?

Here’s where it gets tricky. A contractor can work 40 hours a week on your project, but they’re still not your employee. The number of hours doesn’t determine classification—the relationship does. However, if someone’s working full-time hours exclusively for you, using your equipment, and following your schedule, the IRS might start asking why you’re not treating them like an employee.

Most contractors work for multiple clients anyway, so they’re unlikely to dedicate full-time hours to just your company. If you need someone working full-time exclusively for you long-term, you’re probably looking at an employee, not a contractor.

Are there limits on how many hours contractors can work?

There’s no legal cap on contractor hours unless you put one in your agreement. They can work 60 hours a week if they want—but here’s the key difference: no overtime pay. Contractors get paid according to your contract, whether that’s hourly, per project, or some other arrangement.

The hours should fluctuate based on the work, not follow a rigid schedule. If you’re expecting someone to work set hours every week like a regular employee, that’s another red flag for misclassification.

How many contractors can you hire?

As many as you need, as long as you’re classifying everyone correctly. There’s no limit on the number of contractors you can work with. Some companies work with dozens of contractors across different projects and specialties.

The real question isn’t how many you can hire—it’s whether you’re managing those relationships properly. Each contractor should have a clear agreement, appropriate classification, and the independence that comes with being a true contractor rather than an employee in disguise.

What paperwork do you need?

The paperwork is pretty straightforward, but you’ve got to get it right. Here’s what you need:

Before they start working, have your contractor fill out Form W-9. This gives you their legal name and tax ID number—basically the information you need to report their payments to the IRS later. Don’t skip this step, even if they seem legit. You’ll need it for tax filing.

At the end of the year, if you paid them $600 or more, you’ll file Form 1099-NEC (non-employee compensation). This tells the IRS how much you paid that contractor during the tax year. You’ll send a copy to the contractor, too, so they can file their own taxes.

Miss this filing requirement, and you could face penalties. The IRS wants to know about these payments, especially since contractors are responsible for paying their own self-employment taxes.

How should you pay contractors?

However you agreed to in your contract. Hourly rates work fine for many contractor relationships—especially when the scope might change or you’re not sure exactly how long something will take.

But you can also pay per project, monthly retainers, or milestone-based payments. The key is making sure your payment method reinforces that contractor relationship. Paying someone the same amount every two weeks, like a salary? That starts looking more like an employee arrangement.

Whatever payment structure you choose, put it in writing and stick to it. Contractors submit invoices, you pay according to your agreement, and everyone knows what to expect. No surprises, no confusion about whether this is contract work or employment.

Get classification right

Contractors can be a smart way to get specialized work done fast. But governments everywhere are getting much more aggressive about worker misclassification. What used to be a slap on the wrist is now turning into business-disrupting penalties that can seriously damage your finances and reputation.

The IRS, state labor departments, and international regulators are all paying closer attention. They’re conducting more audits, imposing bigger fines, and asking harder questions about why that “contractor” who works exclusively for you isn’t getting employee benefits.

This isn’t about being paranoid—it’s about being smart. Do your homework on classification rules. Document your contractor relationships properly. And when in doubt, err on the side of treating someone like an employee rather than gambling with penalties.

But what if you’ve got contractors who really should be employees? Or you’re thinking about expanding your team globally and want to do it right from the start?

That’s where Pebl comes in. As an Employer of Record service, we help companies convert contractors to full-time employees—legally and efficiently—across 185+ countries. Instead of wrestling with international employment laws, entity setup, and compliance requirements in every country where you want to hire, we handle all of that complexity for you.

You get the talent you need, your team gets proper employment protections, and you get to focus on growing your business instead of becoming an expert in global labor law.

Ready to build your team the right way? Let’s talk about how Pebl can help you hire confidently, anywhere in the world.

This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.

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