1099 Employment: What Independent Contractors & Employers Need to Know

Note: The following should not be taken as tax or legal advice. Always consult a qualified tax or legal professional for advice about your specific situation.

While the majority of workers in the US are directly employed by an organization, the number of independent contractors, sometimes also called freelancers, gig workers, or 1099 workers, make up a significant proportion of the workforce.

Bureau of Labor Statistics data from 2023 reports approximately 11,904 million people working as independent contractors, consultants, and freelancers as their main or sole job. This is 7.4 percent of total employed people.

It sounds pretty straightforward. An independent contractor or freelancer performs specific paid work for an organization but is not its direct employee. Contractors provide invoices for their billable hours, and are paid by the organization, though taxes are not withheld and benefits are not provided. Each year, the organization issues them a form 1099-NEC instead of a W-2. Contractors may or may not sign a formal agreement with their client company, and may perform work for multiple clients concurrently.

There are clear benefits for both the contractor and the company. Independent contractors often have a flexible schedule, a chance to use niche skills, a variety of projects to work on, and multiple clients. This arrangement can make it easier for companies to obtain access to expertise and additional staff quickly for projects or to fill in-house skill gaps. Working with 1099 contractors often results in less paperwork and fewer expenses related to taxes and benefits administration.

Unfortunately, it’s not quite that simple, and one or both parties can run into snags if they aren’t careful. Here we’ll look at some of the pitfalls of 1099 independent contractor work that contractors and their employers need to know.

The Realities and Risks of 1099 Independent Contractor Status for Workers

There are different broad categories of independent contractors that span a variety of types of work, such as creative freelancing, consulting, gig work, skilled or unskilled trades, and other specialty or contingent work. All of these workers are considered self-employed, and are only paid for time they track and invoice. Instead of a form W-2, they are issued form 1099 at tax time, which states the total dollar amount the client paid them during the tax year.

To be successful, it’s important to understand the nature of independent contract work, what you’re responsible for, and what challenges to be prepared for.

Securing and Managing Clients

Depending on the nature of the work, contractors may or may not perform work for multiple clients or organizations concurrently. Many freelancers and contractors need to find and vet their own clients, and balance their work capacity and deadlines among them. Short-term and gig workers may find themselves spending considerable time to continually line up future projects and clients in order to maintain a steady income.

While this type of administrative work is critical, it is not considered billable work time. As a result, time spent finding clients and managing workload can encroach on the amount of time available for paid work, or result in an extended workday. For many freelance or gig workers, for example, it’s not uncommon to spend 9 or more hours accumulating 8 hours of billable time in a day.

Contractors can also “fire” clients or terminate their contract with a client if the working relationship fails.

Skills and Work

The idea at the heart of most contracting is that organizations hire a contractor for specific work or skills that are not available to them in-house, or to supplement their internal workforce in a defined capacity or for a finite project (and not for ongoing general work).

As a result, a contractor’s work looks and feels different from that of direct-hires:

• The hiring organization is not expected to need to train contractors to perform the work because contractors are supposed to bring their existing service, skills, or expertise.
• Contractors should expect to receive the information and guidance they need to complete their work, but not to be supervised directly.
• Most contract work is done independently, though they may coordinate or interact with an internal team on projects.
• Contractors are generally free to determine when, where, and how their work is done (including sub-contracting work to another contractor).

Pay Structure

In some industries, 1099 workers have leverage to negotiate the terms of their work and pay. This allows them to offset expenses related to employment (i.e., insurance, self-employment tax, equipment, and supplies).

In others, such as construction, security, home health care, housekeeping, or delivery/driving, contractors must choose to either agree to the organization’s terms or find different work. And in these cases, the employing organization rarely builds in monetary compensation into the rate of pay to cover the value of health insurance or retirement benefits.

Practically speaking, this means these workers earn less than their direct employee counterparts doing comparable work.

Benefits

1099 independent contractors do not receive benefits like health or dental insurance, retirement plans, or paid time off. This can make jobs very flexible in terms of scheduling, but on the other hand, contractors are only paid for billable time worked.

Contractors and freelancers are also not eligible for workers compensation, unemployment, overtime, protections under TItle VII or the ADA or FMLA, or the right to organize. More information on how this impacts workers who are misclassified as independent contractors is available here.

Billing and Invoicing

It’s critical to keep close records of hours worked for each client and project and to understand the differences between billable and non-billable hours. For example, time spent on a project for a client or working at a jobsite are generally billable; however, time spent on administrative tasks like promoting your freelance business or preparing invoices, are not. In most cases, the responsibility for compiling and submitting invoices on a regular schedule also falls to the contractor.

Taxes

The organizations 1099 contractors work with do not withhold any taxes from pay. While direct employees have half of their Social Security and Medicare tax withholding paid by their employer, paying only 7.65% themselves out of each paycheck, independent contractors pay the entire 15.3% themselves (calculated on 92.35% of net profits, and paid in quarterly estimates).

In addition to their standard federal, state, and local income taxes, contractors must file forms Schedule C and Schedule SE. This adds a layer of complexity come tax time.

Contracts

Many contractors choose or are required to sign contracts with each client for which they perform work. Contracts are generally written by the hiring organization, so it's important for independent contractors and freelancers to verify the terms before signing and be on the lookout for overly-strict or limiting clauses or missing information. Contracts should cover the following:

• Scope of work and deliverables
• Payment terms
• Clear mention of non-employee status
• IP protections
• Confidentiality or NDA clauses
• Clear process for termination of contract
• Non-compete clauses, including terms and duration

Getting 1099 Contract Work Right: What Employers Need to Know

The biggest issue for many employers with regard to independent contractors, whether they call them contractors, freelancers, gig workers, 1099 workers, or contingent workers, has two facets:

• Correctly classifying workers as either independent contractors or direct employees
• Ensuring the nature of the working relationship complies with applicable federal and state definitions on paper and in practice

Sometimes the difference is clear, such as a company that contracts with a graphic designer to develop promotional materials. In other cases, such as service industries, low-wage work, and manual labor jobs (i.e., delivery driving, home health care, construction, janitorial work) the distinction is imprecise. Common examples include contractors who work closely with direct employees to provide a similar type of skill or deliverable, or contractors working “in the field” scattered throughout multiple jobsites. In these cases, workers may be incorrectly classified as contractors when they are essentially direct employees.

Federal and state laws prohibit companies from treating workers like direct employees in day-to-day operations but classifying them as contractors and issuing them 1099s.

Federal Tax and Employment Law Tests

Even if contractors do the same or similar types of work, they are quite different from direct employees for tax, wage and hour, and labor law purposes. Employers need to understand their responsibilities and potential challenges with determining how to classify workers.

The IRS and Tax Law. The IRS has developed what’s called the common law test for determining classification. It covers the following:

• Who has behavioral control over how work is done
• Who has financial control or who controls the terms of payment
• The type of working relationship, including if benefits are provided, if a contract is signed, if the work relationship is ongoing, etc.

The Department of Labor. The DOL’s “economic realities” test consists of six factors:

• The worker’s opportunity for profit or loss depending on managerial skill
• Investments made by the worker and the employer
• The permanence of the work relationship
• The nature and degree of control of the work by each party
• Whether the work performed is integral to the employer’s business
• The skill and initiative required for the work

In 2024, a rule was implemented to consider how each of these factors contribute to the “totality of the circumstances” in making the determination. However, in early 2026, the DOL proposed a change to that rule, in which two of these factors will have a greater bearing on the determination. Those two factors are the nature and degree of control one has over the work, and the worker’s opportunity for profit or loss based on their initiative or investment in the work.

State-Level Compliance

Some states and the District of Columbia have developed tests for making classification determinations. Called ABC tests, they differ in each state and employers must apply the appropriate test for the state in which employees perform work (which may not be where the employer is located, headquartered, or incorporated).

These tests make the default assumption that workers are direct employees, and the burden is on the employer to prove workers are independent contractors instead. Most ABC tests cover these factors:

• The worker is free from the company’s control
• Their work falls outside company’s usual work or business
• The worker is engaged independently in an established trade or business

More information on each state’s laws is available here.

Understanding Misclassification Penalties

There are serious penalties for misclassifying employees as 1099 contractors, whether intentionally (such as to avoid withholding taxes, PTO, and other benefit expenses), or by accident.

Tax audits can reveal incorrect classifications, and can result in a bill for unpaid taxes as well as penalties including:

• Unpaid FICA taxes totaling 100% of the Social Security and Medicare taxes the employer should have paid (7.65%)
• Income tax withholding of 1.5% to 3% of the worker's total wages.
• Additional penalties for unwithheld FICA taxes totaling 40% of the Social Security and Medicare taxes that should have come out of the worker's paycheck.
• Form penalties of $50 or more for each W-2 tax form that was not filed
• Daily compounded interest, which is added to all unpaid amounts.

The DOL issues fines and other punishments for wage and labor violations under the Fair Labor Standards Act (FLSA), such as:

• Back wages paid for missing minimum wage and overtime
• Fines up to $1,000 per misclassified worker
• Benefits repayment to cover missed costs for workers' compensation, unemployment insurance, and health or retirement plans
• Criminal charges of up to one year in jail for intentional or willful misclassification

States and the District of Columbia may also have fines, penalties, or potential charges.

Tips for Avoiding Worker Classification Pitfalls

Working with independent contractors can be an excellent way to access skills and expertise your organization needs, but it’s critical to understand the applicable tax and labor laws. Remember that it’s not just about terms of employment on paper, it’s also about the working relationship and day-to-day work in practice. Here are some best practices to keep in mind:

• Set up a contract. These agreements protect your company as well as individual contractors with regard to the scope of work, payment terms, NDA requirements, rights to "work made for hire" (such as written content, designs, code they created for your organization), termination of the contract, and other terms.
• Comply with tax requirements. You must collect a form W-9 from independent contractors before issuing them payment for billed hours. Issue Form 1099-NEC with the total paid to the contractor in that tax year noted. In 2026, issuing a 1099 is not required unless a contractor is paid $2,000.00 or more during the tax year.
• Don’t try to control schedules or capacity. In general, you cannot mandate how, when, or where a contractor’s work is performed, and you may not discourage them from having multiple clients at once.
• Provide guidance within limits. You should make sure contractors have the information and guidelines they need to complete their work; however, avoid micromanaging their activity or providing direct supervision.
• Limit training. In general, employers should not provide training for the core work contractors are doing, since by their very nature, contractors are hired for their existing skill or expertise.
• Avoid scope creep. Provide work or projects as outlined in your contract or other agreement but avoid giving them “duties as assigned” or projects outside their area of expertise or skillset.

Have Questions About Classification and 1099 Employment? Talk to the Experts at Horizon.

Don’t go it alone! The team at Horizon has years of experience with HR and payroll for companies of all sizes. We can help you make sense of independent contractor status and what you need to know to stay in compliance. Contact us with your questions or to learn more about our services today.

This content is for general information purposes and does not constitute tax or legal advice, nor does it address federal, state, or local law. Employers should consult qualified legal and tax counsel regarding their specific obligations.