How to Correctly Classify and Pay Your 1099 Freelancers

How to Correctly Classify and Pay Your 1099 Freelancers

The flexible workforce is growing quickly and forcing companies both big and small to adjust their strategy for hiring, onboarding, managing, and assigning ongoing work to these important and valuable workers. If you currently use freelancers or are looking to work with freelancers this year, you’re going to come across a whole new set of challenges when it comes to onboarding, classifying, and paying this team.

Unlike full-time W2 employees, freelancer classification can be much more complex and involved different laws and the federal and local levels.

If you end up misclassifying a worker, you could find yourself facing penalties and fines from the IRS. A headache that no company wants to deal with. That’s is why it’s important to make sure you are classifying a freelancer correctly and reviewing this classification on a regular basis. Freelancers, contractors, consultants, and gig-workers all have different needs when it comes to payment, which makes the process much more complex and time-consuming.

How to classify a 1099 Freelancer

Freelancers can include: gig workers performing specific tasks on a flexible basis, event staff to support seasonal or peak-time functions, Tech, IT, and web development consultants, UX design, branding, content, and marketing experts, and flexible data entry, admin, accountant, and HR roles… just to name a few.

Freelancers will usually work with more than one employer on a flexible as-need basis. The difference between a W2 employee and a 1099 freelancer classification is decided based on three important criteria.  When classifying a worker, you need to take the following three IRS classification points into consideration:

Behavioral Control

Does your business have the right to control how the work is done and what type of work is completed, such as through direct instructions or training? If you train the worker, direct what they do, and specify how the work is completed, he or she is a W-2 employee.

Type of Payment

Employees are usually paid a salary or an hourly wage on a steady, on-going basis. Independent contractors typically receive a flat fee per project.

Type of Relationship

If the person is receiving benefits, there is an understanding this is a permanent role, and they help the regular operation of the business, this person is an employee.

Companies can easily be overwhelmed by this classification process and that’s where a Freelancer Management System can help. By using an FMS to handle the onboarding and classification of your team, you can reduce the legal risk associated with this process and keep one system of record for all your freelancers.

How to pay your 1099 workforce

When you begin working with a 1099 freelancer, you will have them fill out a W9 form that verifies their status. Best practices show that you should keep these documents on file for at least 4 years in case you need to reference back to any tax withholding or contact information.

Once your freelancer has been correctly classified, the next challenge becomes actually getting payments to them on time and efficiently. Companies who choose to try and do this step themselves by cutting checks, issuing ACH’s (electronic payments and automated money transfers), or apps like Paypal and Venmo, will soon realize just how time-consuming this process can become.

Other traditional payment systems like ADP are not set up to deal with rapid, high volume, task-based work of the freelance economy, and this hurts companies as well as freelancers. While PEO providers like Gusto, Tri-net, or JustWorks are great for full-time W2 employees, but just not designed for efficient or compliant freelancer management and payment.

Relying on traditional payment methods for 1099 freelancers is expensive, time-consuming, and can expose your company to legal liabilities. A freelancer payments platform, however, makes prompt payments possible. Collecting the onboarding documents and then automating, standardizing, and streamlining how invoices get processed means freelancers can get paid on time every time. 

An end-to-end management and payment solution can serve as the single system of record for all freelance payments, which enables businesses to keep things organized and oversee their entire budget in one place. 

Ready to learn more about how AllWork can help you correctly classify, onboard, manage, and pay your freelancers? Get in touch to schedule a demo of AllWork!