A 1099 is an Internal Revenue Service (IRS) form for reporting income other than wages, salaries and tips. It is most frequently used to report earnings of more than $600 in a year for independent contractors. Fees paid to independent contractors or consultants are referred to as non-employee compensation. According to the IRS, an independent contractor is not an employee. It is a person “who works at an independent business, profession or trade in which they offer their services to the public.” An independent contractor may work for several clients or just one for a set time period or a specific project. The tax, labor regulations and rights are different for independent contractors compared to employees.
Behavioral Control Rights
An independent contractor has the right to determine the means, schedule and methods used to complete an assignment. The client specifies only the outcome of the work. If training or special equipment is required to complete the work, the independent contractor is responsible for those items without reimbursement from the client. Also, the contractor, not the client, determines where the training will be obtained or the equipment purchased.
Financial Control Rights
Independent contractors have financial control over their work and business. They are free to seek out business opportunities from a variety of sources. They negotiate with clients to determine their rate of pay, and how and when they will be paid. In addition, they own the equipment they use and their fixed operating costs -- recurring expenses related to their business, such as rent, materials and insurance -- continue even if there is no work. Finally, they face the possibility of financial profit or loss in their business.
Relationship Determination Rights
The nature of the independent contractor/client relationship is negotiated by the parties. Typically, the contract covers only the term of the project or assignment and is not open-ended. The work relationship is at will, either the client or the contractor may terminate the relationship, with or without cause. The client may evaluate the end product produced by the independent contractor but cannot perform a traditional employee performance review of the contractor. In addition, the independent contractor is not entitled to benefits provided by the client, such as health insurance, pension plan or vacation pay.
Labor Law Rights
Unlike employees, independent contractors are not protected by the Fair Labor Standards Act (FLSA) and other federal and state labor laws. They are not entitled to overtime pay. If they work more than 40 hours per week, each hour is paid at the contracted rate. They are not covered by workers’ compensation, unemployment, safety or discrimination laws. In addition, taxes are not withheld from their earnings. Independent contractors are responsible for paying income, Social Security and Medicare taxes on a quarterly basis. They receive an IRS form 1099 from their clients for income tax purposes rather than a W-2 form.