What is a 1099 employee?

Form 1099-NEC reports payments to non-employees. Form W-2 reports wages to employees. A worker is one or the other, and the form follows the classification rather than creating it.

This is not pedantry. Calling someone a 1099 employee invites the assumption that you can direct their work like an employee while paying them like a contractor. That combination is precisely what triggers misclassification findings, and the liability runs backwards to the start of the engagement.

On W-2, the employer withholds federal and state income tax, pays half of Social Security and Medicare, carries unemployment insurance and workers' compensation, and must meet minimum wage and overtime rules. Employees are covered by anti-discrimination law, family leave protections and, where offered, benefit plans.

On 1099, none of that applies. The contractor receives the gross amount and pays self-employment tax covering both halves of FICA — 15.3% on net earnings up to the Social Security cap. They buy their own insurance, fund their own time off, and are generally outside the protection of employment statutes.

This is why an hourly rate is not comparable across the two. A contractor rate has to absorb roughly 7.65% in extra payroll tax before anything else, then benefits, unpaid holiday and administration on top.

Not the employer, and not the worker — the facts decide, and agencies apply tests to those facts. The IRS looks at behavioural control (who directs how the work is done), financial control (who provides tools, who can make a profit or loss) and the relationship itself (written terms, benefits, permanence, whether the work is core to the business).

The Department of Labor applies its own economic-reality test for wage and hour purposes, and many states apply stricter standards still — California's ABC test presumes employment unless all three of its conditions are met.

A signed contract saying somebody is an independent contractor carries very little weight against facts that look like employment. Neither does the worker's preference, however genuinely held.

Unpaid employer payroll taxes with interest and penalties. Unpaid overtime going back years. Unpaid unemployment insurance contributions. Workers' compensation exposure for injuries that were never covered. Benefit plan claims from people who should have been eligible. And where the conduct is found to be wilful, materially higher penalties.

Because a single determination usually applies to everyone engaged the same way, the exposure multiplies across the whole group rather than stopping with the person who complained.

Staffing agencies exist in large part because of this problem. When an agency places a contractor on W-2, the agency is the employer of record: it carries the withholding, the insurance and the classification risk, and the client gets flexible capacity without taking on an employment relationship.

This is also why genuine 1099 engagements are less common in staffing than people expect. A worker sitting at a client's site, under the client's direction, on the client's schedule, for nine months, looks like an employee under every test that matters — so responsible agencies engage them on W-2, or corp-to-corp with a properly constituted business entity.