1099 employees sit in the middle area between full-time workers and freelancers – so what is the best way to pay them?
If you work with employees you have an established and set way of paying them with a salary directly into their bank account. With a 1099 employee, though, things can be more complicated, especially if you’re hiring them from another country. In this article, we’ll offer some advice on how to pay them and ensure you tick all the regulatory boxes.
What is a 1099 employee
1099 ‘employees’ sit in the no man’s land between your regular employees and freelancers. It’s not strictly accurate to refer to them as employees, as they are independent contractors who happen to have a regular and long-term relationship with your company.
For example, as your working relationship with an individual evolves, they may become more deeply embedded into your company and regularly work on contracts or perform set tasks.
For example, you start by hiring a content writer for certain tasks. If things go well the relationship might evolve into a more regular and repeatable engagement. For example, that profession might regularly manage certain requirements such as web copy, press releases, or promotional campaigns. The work could be regular, but it will not be set – in other words, you will be paying them for a set output with each contract which is set, and measurable.
Alternatively, you may have a pool of talent to whom you regularly turn when you need work done. In this case, they will be paid on a contract-by-contract basis, with an invoice being raised and settled.
Paying a 1099 employee
Paying a 1099 employee will also be different. Rather than a set amount each week or month you’ll have to draw up a specific agreement with each professional.
This starts with establishing a rate. Each contractor will generally have their rates – either hourly or for specific projects which they will quote. You will then have to negotiate a deal that works for all parties.
It’s important to negotiate a deal that works for everyone including set arrangements on deliverables. This may include provisions for payment to be withheld if the work is not satisfactory. Whatever arrangement you make with the worker, should be set out clearly in a contract.
When the time comes for payment, the contractor will raise an invoice which will have to be settled within a specific time. This can be difficult because you may have to arrange a different payment schedule for other workers.
Full-time employees, for example, may be processed regularly in a single payment run at the end of a month. Contractors, on the other hand, will expect payment to be settled within a set time of each invoice. You’ll have to work with your accounts team to make specific payment arrangements.
In essence, what you’re doing is making payments for the provision of services from a service provider rather than a regular employee.
You may choose from a variety of payment methods including:
• Bank transfer: A regular bank transfer to an account will normally be the simplest and most common approach. Payments can generally be made instantly.
• Payment portal such as PayPal: in some cases, you or the contractor might prefer payment fees to a platform such as PayPal.
• Mobile Payments: Payments directly to mobiles are becoming increasingly popular, especially in countries such as South Africa, and serve as an alternative payment option for people without bank accounts.
• Cash payment: In rare cases, if an employee does not have a bank account you may need to arrange for physical cash payments. These should all be recorded accurately.
If you are paying someone from overseas you should also consider issues such as fluctuating exchange rates, fees, or delays that might disrupt the payment process or lead to additional costs.
If you’re hiring employees in another country, you will also need an established mechanism for doing so. To employ people directly, you will need to set up a legal entity within the country such as a subsidiary. This can be costly. Alternatively, you can work with a partner such as an Employer of Record (EOR) or an Agent of Record (AOR) who can manage the legal implications of employment and ensure all 1099 workers are paid and classified appropriately.
An EOR will generally have the latest recruitment software which can include a payment portal in which you can manage all invoices and global payments across local currencies. It helps you to organize payment information more effectively and have a complete audit for reporting and all 1099 filings.
Managing taxes
Dealing with taxes and legal requirements for 1099 employees can be complicated.
All employees and workers should have the correct personal information and tax identification numbers. Once payments to a contractor exceed $600 per year you will have to fill in a 1099-NEC form and send a copy to the authorities and the worker.
Aside from that your tax obligations will end there. As with other freelancers and independent contractors, 1099 employees sort out their own taxes and social security measures. From your perspective, therefore, they can be much less effort than your regular employees.
However, once you reach the stage of 1099 employment you may run into questions regarding worker classification. The authorities will impose hefty fines for anyone who they feel is trying to pass off employees – for whom they should be paying tax – as contractors. If they feel the breach is intentional, they may even try to impose criminal charges.
The problem is that the more regularly you work with a contractor, the more they might start to resemble an employee. They may spend time in the office and at first sight appear to be just like any other employee.
When differentiating between them you should look at several factors:
• Behavior: A 1099 employee will set their working patterns and practices. They will have more control over where they work and when. With an employee, you can demand work by a certain time, but with a contractor, this will be by arrangement taking into account their work availability.
• Payment: 1099 employees should be paid on a contractual basis for set pieces of work. Once that work has finished they should be paid via an invoice. If you want to work with them on another project you will have to draw up another contract.
• Expenses: As an employer, you pay all out-of-pocket expenses yourself. 1099 employees will bear those expenses themselves.
The tax authorities will evaluate these factors when deciding how 1099 workers should be classified. To avoid unintentional noncompliance it can be worth working with an expert third-party organization such as an Employer of Record (EOR) or an Agent of Record (AOR) to handle worker classification and ensure all taxes and deductions are settled.
For more advice on worker classification or to find out how to keep your workforce complaint download our handy guide here.
