Do 1099 Employees Get Pay Stubs? - Full Guide
In short, 1099 can get pay stubs but they are not a requirement by law. This article details how to define a 1099 employee and how payroll works for them as well as some frequently asked questions related to this matter.
When owning a successful business, you need to make sure that you do right by the IRS and do payroll for your employees correctly- or at least your HR team needs to. This can become quite complicated depending on the type of business you have and the type of employees you have on your payroll.
Managing human resources can be quite challenging especially for a small business where a dedicated HR team is absent. Which leaves payroll administration for you to deal with correctly. In addition to costs associated with just the day to day costs, business owners have to account for staffing costs- which can be astronomical- and can lead to a business owner having up to several classifications of employees on their payroll at any given time, each needing to be handled differently in terms of payroll.
Employee classifications determine which workers are entitled to overtime pay, how they may be compensated and taxed. There are of course different tax forms for each type of employee. There is the W2s which are employees that receive a regular wage and employee benefits. Here, the employer withholds income taxes from the employee's paycheck and has more control over the work the employee does.
There is also 1099 employees which are self-employed independent contractors also known as freelancers or consultants (if you, yourself are a freelancer then this type of tax form applies to you). 1099 employees receive pay in accordance with the contract set out between them and the employer.
Also read: Submitting a W2 Correction Request
A Closer Look at a 1099 Employee
A 1099 employee, or independent contractor, freelancer or consultant, generally provides a very specific service or skillset to the employer for a specific period of time as defined by terms of a contract agreed upon with the employer.
Some 1099 employees only work on one project at a time but have several clients that they are working for simultaneously. Freelancers and consultants are usually self-employed so they are business owners in themselves. When businesses engage with a 1099 employee, they are only there to work for a defined period of time but depending on the nature of work, the contract terms may be amended accordingly. These employees are not considered as permanent staff as they are not privy to benefits like paid-time off, health care or overtime. They also do not get paid a fixed salary like permanent staff and are paid as per terms in the contract. 1099 employees also have the power to hire their own employees or workers to help with delivering the specified service.
The number of people who are working as freelancers or independent contractors is ever-increasing and some industry experts claim that freelancers or independent contractors are starting to make up the majority of the U.S. workforce.
The question that then comes to mind is: how do you manage a 1099 employee in terms of payroll?
Also read: Do You Need Multiple W2 Forms From The Same Employer?
Managing 1099 Payroll
In some ways, paying freelancers or independent contractors is far simpler than paying permanently employed workers. Since you are only bound to the 1099 employee by a contract with specified terms, you do not have to pay unemployment tax or Federal Insurance Contribution Act (FICA) taxes for them as you are not responsible for withholding taxes from their compensation.
When managing the payment of 1099 employees, typically, a 1099-NEC form is initiated by the employer and given to their independent contractors or freelancers. This will then tell the 1099 employees how much they earned in a given tax year. As mentioned above, you as the employer will not be responsible for withholding taxes and the independent contractor must do this themselves. However, filling out these forms is beneficial to keep track of your expenditure on the freelancers and for the freelancers to report the correct information to the IRS when they do their taxes for the previous tax year. It also allows the independent contractor to do things like purchase homes, take out loans, rent homes, and purchase cars.
It is important to note that while doing this is beneficial, it is not a requirement by law for you to initiate a 1099-NEC for your independent contractors or freelancers.
How to Generate a 1099-NEC Form?
This is luckily a relatively simple thing to do. There are several websites or accounting/payroll software that create the 1099-NEC forms for you which will take less than 5 minutes but if you are still unsure, you can also enlist the help of a payroll service to assist you. Many banks have payroll affiliates to help specifically small businesses with generating their payroll. There are also templates available online to choose from and it doesn’t really matter which form you choose as long as it looks professional and has all the necessary information.
The form itself covers a broad range of payments over a specified period and includes all of the extra earnings an individual has aside from salary and wages, including prizes, royalties, awards, and a variety of other payments. All you need to do is fill out the specific details of the 1099 employee like their name and social security number on the form. Other details included are their address, employee identification number, and the sum of payments received within a specified period. After that is done, you can just email the form to your independent contractor or freelancer.
If you yourself are a freelancer or a self-employed 1099 employee, you typically wouldn’t receive a paycheck. Instead, all your income is reported to the IRS based on all the 1099 forms that you have received during the year for the contracted work completed for your various clients.
Also read: Here’s How to Change Your W2 Wage
What Exactly is a Pay Stub?
Historically, the pay stub is the part of a paycheck that shows how much money an employee was paid by a company. These days it is also known as a payslip which is usually attached to the paycheck. Aside from the wages of employees, the pay stubs also contain information on deductions for a specified period attached to the paycheck and it also contains information on hours worked, earning type, and taxes. In short, they are legal proof of income meaning they are accepted by banks and the like.
What Payments Can Be Excluded from the 1099-NEC Form?
Not all payments have to be reported on the 1099 form, even if they are taxable. Any other payments can be recorded on the W2 form instead but some exceptions from the 1099-NEC form are payment for telephones, payment for wrongful incarceration for a criminal offence, etc. a list of the payment exceptions are on the IRS website.
Can You Pay an Independent Contractor or Freelancer in Cash?
You can pay independent contractors or freelancers in cash but you still should report this on your 1099-NEC for your own accounting purposes and for the independent contractors’ benefit as well.
So in answer to the question: Do 1099-employees get pay stubs?, yes, you should generate pay stubs for them as it helps you keep track of what you are paying independent contractors and it helps both parties stay in check with the IRS. Hopefully, this short article has given you enough information to do your payroll with confidence and ease.