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What Is a 1099 Independent Contractor?

Nontraditional employment accounts for the largest segment of new jobs. This means the majority of jobs created in the past decade aren’t traditional, “9-to-5” full-time ones with benefits.

So, what exactly are these new jobs?

A lot of labels both new and old are used to describe nontraditional and contingent work. To make things even more confusing, the labels workers use to describe themselves are inconsistent. For example, one person may be an independent contractor but identifies as a freelancer, while a self-employed writer may look confused when you suggests she’s both a contingent worker and a gig worker.

Let’s look at what each label means and the key differences among them.

The rise of self-employment.

Contingent Worker

This is a broad term that encompasses all the other labels defined below. A contingent worker is anyone who is hired on a temporary, on-call, part-time or contingent basis by a company or firm. According to the Government Accountability Office, contingent work includes agency temps, on-call workers, contract company workers, independent contractors, self-employed workers, and even standard part-time workers.

This bloc in total accounted for 40.4% of the entire workforce. Here’s where things get complicated: standard part-time workers are usually W-2 employees (in which the company they work for covers half of the tax obligation, compliance and sometimes insurance) whereas self-employed and independent contractors are 1099 workers (in which they cover their own tax obligation and insurance). So within the label of contingent worker are two subsets: 1099 and W-2.

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1099 Contractor & 1099 Worker

This is term includes anyone who does some form of independent or freelance work and thus receives a 1099 tax form. Analysis of IRS 1099 tax form filing by the Bay Area Council Economic Institute reveals that the growth of 1099s are outpacing traditional W-2s:

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Other studies have also noted the rise in contributions from self-employed taxes which surpassed $64 billion in the 2014 fiscal year. What factors help explain this trend? More workers are choosing to become 1099s in addition to companies shifting large portions of their workforce from W-2 to 1099 (which may or may not be a valid classification). Common examples of 1099 contractors are Uber drivers, taxi drivers, and certain types of physicians.

Independent Contractor

Independent contractors are both 1099 workers and self-employed. This term includes anyone who is contracting for a company or firm. A key marker of independent contracting is flexibility to work when and for whom they want. But like all independent work, these contractors are responsible for covering their own taxes and insurance (if they don’t already receive insurance from another job, parent, or spouse). A large segment of independent contractors also have part-time or full-time traditional employment. This further complicates accurately measuring them because in surveys someone who does both W-2 work and 1099 contracting won’t solely identify as an independent contractor.

MBO Partners’ annual State of Independence Survey estimates that 17.8 million Americans are full-time independent contractors (independent work is their main source of income and accounts for more than 15 hours of their weekly work), while 12.4 million are only part-time independent (and typically have an alternative job). Common examples of independent contractors are real estate agents, accountants, truck drivers, and cosmetologists.

Freelancer

Freelancer is by far the most ubiquitous and entrenched of all the terms. In a recent survey by Edelman, Upwork, and Freelancers Union, researchers estimated that 53.7 million Americans freelance. They surveyed anyone who does some portion of freelance work which includes moonlighters who might take on one project outside their W2 work a year -- with this broad definition, one in three Americans is technically a freelancer. Freelancers are practically synonymous with independent contractors. Both have flexibility in terms of how much they work (and generally for whom they work) plus they are basically one-person businesses handling their own taxes and insurance. Common examples of freelancers are writers, graphic designers, and business consultants.

Self-Employed Worker

This is another more traditional term that tends to describe full-time independent workers. A self-employed worker is anyone who works for themselves and is essentially their own boss. The Bureau of Labor Statistics (BLS) provides the most routine measurements of self-employed workers. Combining BLS and survey data, the Pew Research Center recently released a report finding 14.6 million workers are self-employed, accounting for 10% of the entire workforce. This number is way below estimates of independent contractors by MBO (17.8 million) and freelancers by Upwork/Edelman (53.7 million).

Why such a vast discrepancy? The BLS bases its count of self-employed on monthly surveys in which they call workers and ask them if they identify as self-employed and until 2011 they only counted a narrow segment of unincorporated self-employed workers. As you can imagine, a lot of workers may have both W-2 and 1099 jobs or multiple 1099 jobs that are different types of labor (food service and childcare, for example) so responding simply “yes” or “no” to the question of “Are you self-employed?” is very limiting. Two terms worth further defining that typically fit under the definition of self-employed:

•  Incorporated self-employed: This term refers to workers who have created their own corporate identity in the form of a Limited Liability Corporation, an S-Corporation, or C-Corporation    among others. Self-employed workers are increasingly establishing themselves as legal entities and forming LLCs.

•  Unincorporated self-employed: Unincorporated workers are self-employed but not working through any established legal entity.

Common examples of self-employed workers are real estate agents, accountants, general contractors, yoga instructors, and taxi drivers.

On-Demand Worker

An on-demand worker typically works for a technology platform which provides a particular service on-demand. The most well-known platforms include Uber, Lyft, Postmates, Upwork, and Amazon’s Mechanical Turk. The majority of on-demand workers are 1099 contractors but several notable companies like Shyp, Luxe, and Instacart have transitioned a portion of their staff from 1099 contractors to part-time or full-time W-2 employees. According to the 2014 MBO State of Independence study, 9% of independent contractors work on on-demand platforms. Meanwhile, Intuit and Emergent Research released a study this year reporting the number of on-demand workers is 3.2 million and only expected to grow.

Gig Workers

Gig workers can include both traditional independent contractors, freelancers, and on-demand workers who perform project- or gig-based work.

Temp Workers

This is another older, broader term describing a worker who does some form of contingent or temporary work. Temp workers can be both W-2 or 1099 depending on the company, role and industry. Recently a lot of temporary staffing agencies and other forms of temporary hiring have come under scrutiny for misclassifying their workers as 1099 in an effort to cut costs (like payroll taxes, health and liability insurance).

Nonemployer Businesses

A nonemployer business is a small company or, more often, one-person-business that hires no employees. This term is used by the U.S. Census in their count of business types and entrepreneurship. Quite simply, it is the same as self-employed.

Common Thread

As you can see, there are many discrepancies in how non-traditional work is defined and measured. What is not in dispute is that there is an increase in alternative work arrangements on both the individual worker side and the side of the companies, perhaps a desire for more flexibility on the part of both workers and employers. Steve King, a leading researcher of the independent workforce, best explains factors driving this trend. Even though statistics on the growth of self-employment vary widely, “...the long term trends driving the structural shift towards a larger independent workforce are still in place and strong:

Companies will to continue to hire more contingent workers

• Aging boomers and freedom seeking millennials will continue to find self-employment appealing

• Companies will continue to cut benefits - especially ever more costly health benefits

• Traditional job security will continue to decline due to intense competition and rapid change

• Self-employment will continue to offer more work autonomy, control and flexibility

• Self-employment will continue to allow people to pursue their passions and do work they enjoy

• Lots of people will continue to want to be their own boss

In other words, the already large independent workforce will continue to grow.”

Laura is the Director of Marketing at Payable.

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