Running your own business offers you flexibility and freedom to do work you love. However, when it comes to things like contracts, taxes, and 1099s, it’s normal to feel a little overwhelmed. If you’re self-employed or run your own business, it’s important to understand some of the legalities of independent contractor work. 

You might have questions like:

- What forms do I need to send to businesses or clients I work with?
- Do I need to give a 1099 to anyone who earned $600 or less from me?
- What’s the difference between a W-9, a 1099-NEC, a 1099-MISC, and a 1099-K?
- What happens if I take payments through a platform like PayPal or Venmo?

As a lawyer and a small business owner, I understand your dreams for your business and the issues that keep you up at night. Questions about 1099s can feel intimidating, but it’s often not as complicated as you think! Here we’ll cover the ins and outs of 1099s to give you more peace of mind in your business—during tax season and throughout the year. Pretty soon, you’ll be a 1099 pro!

Use the links below to jump to sections you’re interested in:

What Does it Mean to be an Independent Contractor?

Employees vs Independent Contractors: What’s the Difference?

What is an Independent Contractor Agreement?

What Tax Forms Do I Need for Independent Contractor Work?

What is a 1099NEC?

What is a 1099K?

Action Items For Businesses that Hire Independent Contractors

Action Items For Service Providers and Freelancers

What does it mean to be an independent contractor?

The first thing you need to know is the definition of an independent contractor. An independent contractor (aka “freelancer”) is self-employed and performs specific services for clients. They generally take on one-time jobs, like photographing an event or designing a website. They are paid by different clients or companies and set their own rates and schedules. This is different from an employee who works an everyday job, such as working full-time with a salary and a consistent 9-5 job. (We’ll get into more details on the legal differences between employees vs contractors later.)

Independent contractors are a great way to expand your business without taking on the commitment, liability, and risk of hiring employees. I use 1099 contractors all the time in my business. While I successfully did business on my own at first, it grew too quickly for me to keep up on my own. So, I hired 1099 contractors for graphic design, website design, and virtual assistant tasks.

Here are some more examples of how business owners might work with independent contractors:

- A photographer hiring a second shooter for a large wedding or event.
- A wedding planner hiring a freelance designer to create custom wedding signage.
- An online course creator hiring a copywriter to write a high-converting sales page.
- A website designer hiring a freelance illustrator to provide digital artwork.

Business owners can hire independent contractors and employees to do the same or similar work. However, there are important legal differences between employees and independent contractors. The classification makes a difference in how you pay them and how they pay their own taxes.

Employees vs independent contractors: what’s the difference (legally speaking)?

The Fair Labor Standards Act sets laws on minimum wage, overtime pay, youth employment, and more. [1] Business owners can run into trouble if they do not comply with these laws and misclassify employees as independent contractors. But sometimes it’s tricky to tell whether someone is an employee or independent contractor.

In 2024, the Department of Labor issued a new rule that explains the difference between an employee vs an independent contractor. 

Here are some questions to help you figure out if you or someone who you work with is an employee or independent contractor:

1. Is the worker able to control their earnings by how they manage their business? (Their profit is not limited to the number of hours or projects they complete.)

2. Does the worker invest in their own tools and equipment?

3. Is the work relationship temporary, sporadic, or non-exclusive (the worker can serve multiple clients at once)?

4. Is the worker able to set their own schedule and work free of supervision?

5. Are the worker’s services NOT critical, necessary, or central to the business they provide services for?

6. Does the worker bring skills and initiative and is not dependent on training from the potential employer?

A YES to any of these questions makes it more likely that you can safely call someone an independent contractor. The law takes ALL of these factors into consideration; one factor is not more important than another. [2]

**Overall, the main difference is that an employee is dependent on an employer for work, while an independent contractor is in business for themself.

If you hire contractors, ensure that you don’t control their schedule and that contractors can say no to projects. You can give them projects and deadlines, but must allow them space, time, and control to complete projects as they see fit.

Keep in mind that federal, state, and local laws may have different standards for classifying workers.

What are the differences in hiring employees vs independent contractors?

Trying to decide between working as an employee or an independent contractor? Or figuring out whether to hire one or the other? Employees typically provide ongoing, structured work, whereas independent contractors complete specialized or short-term projects.

Below are more important factors to be aware of when comparing employees vs contractors.

1. Employment Law

As mentioned above, employees and contractors are different according to employment laws. Employees are covered by a number of federal and state labor laws. For example, depending on the state, employers must carry workers’ compensation insurance in case employees are injured. Contractors, on the other hand, are NOT covered by these types of employment or labor laws. 

2. Payment Schedules

Payment schedules can vary between employees and contractors. For employees, business owners must establish a regular pay period, based on an hourly rate or a salary. For contractors, business owners pay them after receiving an invoice from the contractor. Business owners have more flexibility in how they pay contractors. Employers can pay contractors a lump sum, or an hourly, daily, or weekly rate.

3. Unemployment Insurance & Withholdings

An employer must withhold payroll taxes from employees’ paychecks and match certain amounts. These include federal income tax, state income tax, Social Security tax, and Medicare tax. Business owners also need to report state and federal unemployment insurance for employees. Business owners have no obligation to do so for contractors. There are also differences in tax documents and reporting requirements between employees and independent contractors.

I recommend that entrepreneurs seek help from independent contractors first before hiring employees. Your business is likely to fluctuate as you start out. Working with contractors will allow you to get help where and when you need it, without hiring someone with a set amount of hours and all the other particulars that come with hiring employees.

For more on this topic, check out this early episode of The Legal Paige Podcast: Episode 10: The BIG Debate Independent Contractors vs. Employees. 

Also, watch a breakdown of the differences and benefits between contractors and employees in this YouTube video: Independent Contractor VS Employee. 

Is it better to be an independent contractor or an employee?

There are many benefits to working as an independent contractor vs as an employee. For instance:

- You are essentially your own boss
- You can make your own schedule (and work in your pajamas in bed if you’d like!)
- You may be able to receive self-employment tax advantages
- You can work remotely from anywhere in the world
- You control what clients or companies you work with
- You can turn down certain projects if you don’t want to do them
- You can work for multiple companies at the same time and earn more money
- You can maintain control over your work/life balance
- You can maintain your intellectual property

For these reasons, many creatives and service providers choose to run their own businesses and operate as independent contractors rather than looking for traditional employment.

What are the cons of being an independent contractor?

There are some challenges to being an independent contractor rather than an employee. For example: 

- You have to pay your own taxes. I suggest you save around 25%-30% of each payment in a separate bank account only for tax liability.
- You likely won’t receive any benefits.
- You will have to pay your own expenses for things like an office, equipment, software, commuting, etc.
- It’s a good idea to weigh out these pros and cons if you’re unsure whether self-employment is right for you.

How do I know if I should be classified as an employee or an independent contractor?

As I mentioned above, businesses need to classify workers correctly to abide by employment laws. If you’re working for a business as an independent contractor, you want to ensure that:

1. You are determining your own hours and whomever you work for merely delegates projects or tasks 

2. You are using your own equipment

3. You are invoicing each company for the work you perform

You are likely considered to be an employee rather than an independent contractor if: 

- You use the company’s equipment
- You work in their company office/home office
- You are expected to be in the office from a certain time to a certain time
- You clock hours using some sort of system that the company provided without sending them an actual invoice

If you should be classified as an employee, the company should withhold taxes from your paycheck.

What are the first steps to legally working as an independent contractor?

1. Register your business name with your state. (Learn more on this here.)
   Alternatively, register your business as an LLC. You can find out if an LLC is right for you in this article: How to Choose Your Business Entity: Sole Prop vs. LLC vs. S-Corp.

(For step-by-step instructions on how to register an LLC in your state, check out our LLC Registration Guides.)

2. Obtain an Independent Contractor Exemption Certificate, if it’s required in your state. This certificate verifies that you are registered as an independent contractor with the state. You provide this certificate to the companies you work for, which exempts them from paying workers' compensation, unemployment insurance, and certain taxes for you.

3. Sign an independent contractor agreement with each company you work for! You can provide your own for them or sign one they provide for you. Make sure you clearly define your role, responsibilities, and pay. 

Now that you know what an independent contractor is, let’s talk about how to set up a legally legit contract.

What is an independent contractor agreement?

An independent contractor agreement is more than just a piece of paper – it's a legally binding contract between a 1099 worker (aka an independent contractor) and the company they are going to do work for.

For employers, a crystal clear independent contractor agreement helps prevent claims that a contractor missed out on employee perks (such as benefits, overtime pay, unemployment pay, etc.). An independent contractor agreement also charts a course for resolving disputes in case the unexpected happens. 

If you are the contractor, a solid agreement helps you set clear expectations with the company, such as rates, timelines, and deliverables. It might seem a bit much, especially for smaller projects, but an independent contractor agreement helps you set yourself up for a seamless collaboration.

Below are our top 10 clauses to absolutely include in an independent contractor agreement.

What should I include in an independent contractor agreement?

Whether you’re hiring an independent contractor or working as one, these are elements you don’t want to miss including in your independent contractor agreement. (We include all of these and more in our independent contractor agreement template at The Legal Paige.)

1. Scope of Work Clause: This clause should be the first clause in the contract. Clearly define the tasks and responsibilities the independent contractor will fulfill. Be specific about project deliverables, deadlines, and any other relevant details to avoid misunderstandings. Also, best practice is to include a statement that no hours are guaranteed and the contractor will be hired on a project-by-project basis.

2. Fees Clause: A Fees clause usually follows the Scope of Work clause. This outlines the compensation structure, including the method and frequency of payment. Specify whether the contractor will be paid a flat fee, hourly rate, or monthly rate.

3. Work Relationship Clause: Clearly explain that the worker is considered an independent contractor and not an employee. This is important for tax purposes, as independent contractors are responsible for their own taxes and benefits.

4. Confidentiality Clause: Include a clause that protects the business’s sensitive information and intellectual property. Clearly define what information is confidential and outline the contractor's responsibilities regarding the handling of such information.

5. Term & Termination Clause: Clearly outline how long the agreement is valid for and the conditions under which either party can terminate the agreement. This includes factors such as breach of contract, failure to deliver, or completion of the project. Be sure to explain that either party can terminate at any time and that all work performed by the contractor up to that point will be compensated for.

6. Insurance & Liability Clause: Mandate that the contractor is required to carry liability insurance and specify the extent of coverage. This helps protect both parties in case of unforeseen events or accidents during the course of work because the employer’s  business insurance will likely exclude coverage for any contractor’s mistakes and negligence.

7. Work Product Clause: This is a copyright clause that clearly defines who retains ownership of any intellectual property created during the engagement. Usually, it would be a ‘Work Made for Hire’ situation where the contractor’s work product would automatically be assigned to the company it is doing work for.

8. Non-Disparagement Clause: In this clause, both parties agree not to talk negatively about the other and damage their reputation. This serves to prevent a contractor from talking badly about the company to future clients, or for the company to talk negatively about the contractor.

9. Representations and Warranties Clause: First, the employer should have the contractor verify that they don’t have any other employment or contract work that would prevent them from fully performing the work agreed to. Next, explain that your company will not make any specific accommodations for the contractor to complete their work. And, finally, state that the contractor is expected to use their own tools, equipment, platforms, internet, and workspace. This distinction further reinforces the independent nature of the contractor.

10. Non-Solicitation Clause: This clause will mandate that the contractor cannot take your clients from you upon termination or solicit any clients from your company during their working relationship with your company. (Note: this type of clause CAN be included in a contractor agreement but a non-compete clause CANNOT!).Remember that non-solicitation laws are state-based, so you must check with your state laws to ensure that you can limit solicitation within your independent contractor agreement.

Wondering if you should hire a lawyer to help you draft this type of document? Not necessary! The Legal Paige created a straightforward independent contractor agreement template for your legal toolkit. The template includes all of the clauses listed above and more to establish a mutually beneficial relationship between employer and contractor. 

When you purchase TLP's independent contractor contract template, you can easily download the template in both PDF and Word versions. You can then customize for your business needs.

What is a service agreement for an independent contractor?

If you are a self-employed service provider, another approach is to use a service agreement instead of an independent contractor agreement. Your service agreement should include the important details of your work relationship, including the work relationship clause (aka independent contractor clause). This approach gives you a contract tailored to the unique risks and expectations of your industry. 

Some of the contract templates we’ve written for service providers include:

- Virtual Assistant Contract
- Copywriting Contract
- Website Designer Contract
- Social Media Manager Contract

You can find these contracts and more for business-to-business service providers in our contract template shop. 

If you already have a service agreement, another option is to add a Work Relationship Clause. This allows all parties to agree to the independent contractor (not employee) relationship.

What Tax Forms Do I Need for Independent Contractor Work?

When tax time rolls around, there are a few forms you need to get familiar with if you hire or work as an independent contractor. Check out this video for a quick rundown: 5 Ways Independent Contractors vs Employees are DIFFERENT Come Tax Season (2023).

I’ll answer some of the most common questions about 1099s below. 

What is a W9?

“W9” or “W-9” is short for Form W-9, Request for Taxpayer Identification Number and Certification. The W-9 is a short, informational form for businesses. It includes a contractor’s name and taxpayer identification number so the employer can issue a 1099 to the contractor at the end of the year. 

Companies request a W-9 before paying an independent contractor or freelancer $600 or more in a year. For example, a freelance graphic designer submits a W-9 to a web design company hiring them for a project. This helps the web design company have accurate information to report to the IRS via Form 1099.

If you’re a freelancer, creative, or small business owner, you need to fill out a W-9 for any business that hires you. Think of the W-9 as Step 1 (providing or collecting your info) and the 1099 as Step 2 (reporting payments).

What is a 1099-NEC?

Form 1099-NEC, Nonemployee Compensation is the form used to report payments made by businesses to nonemployees. Prior to 2020, Form 1099-MISC was the form small business owners were used to seeing. Starting in 2020, however, the 1099-MISC form was replaced by Form 1099-NEC. (Form 1099-MISC is still around; it's just used to report different income such as rent or payments to an attorney.)

Under the IRS regulation, any business that pays an independent contractor $600 or more must file a 1099-NEC on or before January 31.

Here are five easy steps to determine if you need to file a 1099-NEC:

1. Is the person working for you and not an employee?

2. Were payments made in the course of your business? (This doesn’t apply to payments for personal services).

3. Have they made over $600 from you in the last calendar year via direct deposit, check, cash, or bank-to-bank transfer? Payments less than $600 do not require a 1099.

4. Is the independent contractor unincorporated? This includes individual/sole proprietors, partnerships, Limited Liability Companies (LLCs), Limited Partnerships (LPs), or estates.)  If they are taxed as an S-Corp or C-Corp, you usually don’t need to issue a 1099-NEC. You can find a contractor’s tax status on their W-9 form.

5. Was the payment made via cash, check, or bank-to-bank transfer? You do NOT need to file a 1099-NEC for payments made via credit card, payment card, or third-party networks (like PayPal Goods & Services, Stripe, or Square. The payment processor reports these instead with a 1099-K. (More on this below!)

If you answered YES to ALL FIVE, you need to fill out and file 1099-NEC forms. File the form for each contractor with the IRS and your state, if your state requires it. Also, provide a copy of the 1099-NEC to the contractor you paid for their records.

1099 contractor reporting is necessary and REQUIRED! Accurate and consistent 1099 reports are crucial for both the company and the creative/entrepreneur contracting out work. However, the liability falls on the business owner, not the contractor, for any failure to report.

How do I file Form 1099-NEC?

No need to stress about how to file a 1099-NEC! These forms can be done easily online. All you need is the contractor’s name, SSN (or business EIN), address, and total amount paid throughout the year.

Just follow the steps below:

1. Access a trusted website such as 1099online.com or payroll.intuit.com These services will allow you to input contractor information and pay the associated filing fee.

2. Enter information about your company (EIN, address, contact info, etc.)

3. Enter individual information about your contractors (you’ll need their SSN, address, and total amount earned)

1. Helpful hint: Have a W9 Form immediately available when you hire an independent contractor to ensure you have this information at the beginning of your relationship. Or you can send them a W9 at the beginning of the year to ensure your records are up to date.

4. Pay a small fee to complete the forms.

5. Save a PDF or print a copy for your records.

6. Email or mail a copy of the 1099-NEC form to each of your contractors and ask them to verify the information.

7. Submit the forms through the third-party service to the IRS. They will also send copies to contractors, often with the option of digital delivery.

Other options are to order official IRS forms to print hard copies of the 1099-NEC and mail them to the IRS. (This is not allowed for large amounts of forms). Or you can apply ahead of time to file directly with the IRS FIRE System. However, third-party services are often the simplest option for small businesses.

If it feels like too much to file your own 1099s right now, a CPA can handle it in a jiffy! They will also check for errors, duplicates, and S Corps that don’t require 1099s.

If you need a Bookkeeper or CPA we have gathered our favorites in an easy, convenient list. Get the list HERE! 

Whichever method you choose, just be sure to file your 1099s by Jan. 31st each year.

What if I hired a contractor outside of the U.S.?

If you hire a contractor who is not a U.S. citizen, and the services were completely performed outside of the United States, you do not need to complete a Form 1099. Instead, it is recommended that you have them draft a letter certifying that they are not a U.S. citizen or business and that they are performing the work outside of the country, or have them fill out a W-8BEN. If you are ever asked about these payments to foreign contractors, you will have peace of mind knowing you have these documents to hand over to the IRS.

As for a payment method, your BEST option is to pay the contractor via a payment processor. That way, you're not liable for a 1099 NEC no matter what.

What is a 1099-K?

One of the newest tax forms that the IRS has introduced in recent years is Form 1099-K, Payment Card and Third Party Network Transactions. The 1099-K is issued by payment processors or third-party settlement organizations (e.g., PayPal, Venmo, Stripe) to report payments made through their platform. The IRS created this form to better record digital purchases that businesses were not reporting. 

President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law on March 11th, 2021, which lowered the threshold for 1099-Ks to be issued from $20,000 to $600. Yup, $600 flat. However, the IRS is taking a phased approach to this new threshold. 

Organizations need to report total payments of:

- More than $5,000 in 2024
- More than $2,500 in 2025
- More than $600 in 2026 and thereafter

So if you were paid more than $5,000 in 2024 through credit cards or third-party settlement organizations like Stripe or Paypal, you should receive a Form 1099-K from them. Use this form to calculate your taxable income. For more clarity on 1099s, catch Episode 188 of The Legal Paige podcast: What’s the Difference Between 1099-MISC, 1099-K, and 1099-NEC Forms?

Luckily for you, these forms are created and sent out by Paypal/Stripe/Etsy/eBay/Amazon and the like so you do not have to do it yourself. Once received, you’ll use Form 1099-K to figure out and report your taxable income when you file your tax return. 

 I explain more of what you should know about 1099-K in this YouTube video:

1099-K vs 1099-NEC Explained! (Venmo, PayPal, Stripe Tax Docs) 

Keep in mind that the 1099-K may include both personal and business payments, depending on the platform. You do NOT owe taxes on personal funds such as gifts from family or friends. At the same time, payments may be missing from your 1099-K if they were sent as personal transactions. For example, if you used a personal Venmo or PayPal account using 'Friends & Family'). In these cases, you are still required to report that income on your tax return.

Follow these instructions from the IRS to help you navigate using a 1099-K: What to do with Form 1099-K.

Also note that some states have their own rules regarding third-party reporting. Here is a good resource to check your state’s regulations. Be sure to also check with your CPA, because tax professionals will have the most updated information related to your state.

The great news is… this 1099-K regulation really shouldn’t affect your taxes much at all. You should be reporting all revenue you make to the IRS anyway. Unless your total earnings are under $600 for the entire tax year, you are required to report your income to the IRS. Otherwise, it’s considered tax fraud, which could cause major issues if you are audited.  

For more background on the 1099-K, check out this article. 

How can I avoid double reporting with Form 1099-K?

It’s been confusing for freelancers who have clients pay through platforms like PayPal and then get BOTH forms (aka a 1099-K from PayPal and a 1099-NEC from their client, for example) by the time they file their taxes.

If not handled properly, the 1099-K and 1099-NEC can make it seem like you’re earning double your income to the IRS. For example, let’s say you make $20,000 a year freelancing and all of your clients pay via PayPal. Then your clients all send you 1099-NEC forms AND PayPal sends you a 1099-K form. This makes it look like you are making $40,000 a year. The IRS is going to see the larger amount and tax you on it OR audit you because it appears you are underreporting your income.

You can avoid 1099-NEC or 1099-K confusion from clients altogether by changing your payment policy. Here are three options: 

1. If you want everything to be recorded via PayPal/Stripe/Square, only accept payments through that platform (aka credit cards, debit cards, or money transfers). These payments should appear on your 1099-K.

2. If you want to avoid being issued a 1099-K, implement payment with your clients via checks, cash, bank-to-bank transfer, or a platform like Zelle.

3. If you are fine with both, you need to clearly state to your clients who pay through third-party payment processors (like Stripe, Square, or PayPay) NOT to give you a 1099-NEC form. You can do this by sending them an email at the end of year.

Getting clear on your payment policy can make tax reporting much more straightforward. 

Why is Zelle exempt from 1099-Ks?

Zelle is exempt from issuing a 1099-K because it doesn’t hold funds or process payments in the same way as PayPal, Venmo, or Stripe. It acts as a service for transmitting payments between accounts, without processing or storing the funds. 

For more helpful discussions on tax forms for your small business, check out this podcast episode: Episode 115: Getting Ready For End of the Year Business Tax Deductions, with Atiya Brown.

The Legal Paige Take: What to Know About Independent Contractors and 1099s

Action Items For Businesses that Hire Independent Contractors

1. Confirm that you are correctly classifying service providers as either employees or independent contractors. (An independent contractor must be truly independent for you to not have to abide by employment laws.)

2. Start off your work relationships legally strong with an independent contractor agreement.

3. Collect Form W-9 to receive basic information about contractors who work for you.

4. Email or mail a copy of Form 1099-NEC to each of your contractors and ask them to verify the information.

5. By Jan. 31: Issue 1099-NECs to each contractor you paid $600 or more over the previous year. 

Action Items For Independent Contractors such as Service Providers and Freelancers

1. Confirm that you are being correctly classified as either an employee or independent contractor for your business-to-business relationships.

2. Set clear expectations and legal protections with an independent contractor agreement or a service agreement specific to your industry.

3. Provide Form W-9 to companies you provide services for.

4. At the end of the year, send the total you invoiced to each company. They should send you a Form 1099-NEC.

5. Use Form 1099-K for payments made via credit cards and third-party payment platforms to help you accurately report your income.

6. Report your accurate income on your tax return (regardless of the forms you receive).
   

Remember, a CPA should be guiding you through tax season. Finding a good CPA is essential to help your business grow while complying with tax laws. A bookkeeper can help as well! Get access to TLP’s recommended bookkeeper list HERE.

If you have employment law questions, consult an attorney such as Griffith Suazo Law. You can also throw out questions to our Facebook group of creatives and small business owners inside The Legal Paige Community.

Finally, don’t believe everything you read online about 1099s. The IRS is your best resource for current and truthful information.

Sources

[1] U.S. Department of Labor. Wages and the Fair Labor Standards Act.

[2] U.S. Department of Labor. Frequently Asked Questions - Final Rule: Employee or Independent Contractor Classification Under the FLSA.