With the rise of freelance and contract workers in the U.S., employers are grappling with how to effectively integrate these contract workers within their organizations.
One of the most frequently asked questions regarding independent workers is whether 1099 employee benefits are required or not, especially when benefits are being offered to W-2 employees.
In this article, we'll explore 1099 employee benefit eligibility.
What is a 1099 employee?
Despite being commonly referred to as “employees,” 1099 workers are actually independent contractors. The term 1099 employee comes from the Internal Revenue Service's Form 1099, which independent contractors fill out to report their annual earnings.
Self-employed individuals and sole proprietors are also considered 1099 employees.
Contactors are generally temporary workers who businesses pay for specific duties or projects. These projects can be long-term, but the contractor will no longer be employed by the organization that hired them at the end of the project.
Providing workers with tax form 1099 or excluding them from payroll isn't enough to make them 1099 employees. Officially, organizations must prove that the worker is free from the control of the organization and was independently established as a freelancer or sole proprietor.
Contract workers are responsible for providing their equipment and supplies to do the work. Self-employed individuals have more flexibility in their schedules, how they work, where they work, and who they work for than regular W-2 employees. They are also responsible for their own self-employment tax and income tax withholding.
How do I know if my employee is an independent contractor?
The Fair Labor Standards Act (FLSA) established different tests to help organizations determine if their workers are employees or independent contractors.
You must correctly identify whether your workers are employees or independent contractors. If you're unclear on whether a worker is an employee or a contractor, you can file Form SS-8 with the IRS so that they can determine the worker's official status.
Ultimately, it comes down to the type of relationship you have with your workers. For example, do you control your workers' hours and locations, or is that up to them? One of the best ways to ensure that your workers are considered 1099 employees is to sign a contract when they are hired.
Hiring a 1099 worker as a small business can help you save money long-term and acquire better talent for specific projects rather than employing someone full-time. To hire contract talent, you'll need to offer competitive benefits.
Are 1099 employee benefits required?
Organizations aren't required to provide benefits to self-employed workers like contractors. However, you can do so in some cases as long as you follow regulations and applicable state laws. For example, 1099 employees have to declare any benefits as taxable income.
Employers aren't required to pay health insurance premiums for their 1099 employees, even if they're offered a group health plan. Contractors can deduct these premiums on their tax returns and any business expenses.
Historically, most organizations chose not to offer their 1099 employees any benefits. But, this is starting to change due to a tight labor market and a need for highly specialized talent.
Why offer benefits to 1099 workers?
With the growing gig economy in the United States, more contractors and freelancers are looking for work. These independent workers are often highly skilled and specialized in their fields compared to regular employees.
Your organization needs to offer competitive employee benefits to tap into this independent talent pool. Otherwise, you'll lose out on top talent to your competitors.
Self-employed independent contractors can also request certain employee benefits, such as paid travel expenses or health insurance, when negotiating their contract with your organization.
So, what benefits are most appealing to contractors? We'll explain a few of the top benefits available to 1099 employees.
What benefits can I offer 1099 employees?
There are many benefit options available for 1099 employees. Some of these can take the form of more traditional employee benefits, while others are additional perks that won't necessarily cost your organization.
Some of the most common benefits available to 1099 workers are:
- 401(k) and retirement plans
- Health benefits, including group health insurance and health stipends
- Travel benefits and mileage reimbursement
- Fuel card
- Uniforms and equipment
- Remote work benefits
- Educational benefits
- Wellness benefits
- Corporate discounts
We'll look at a few of these in more detail in the sections below.
Retirement benefits for 1099 workers
There are many retirement benefit options for the self-employed, including the simplified employee pension (SEP), 401(k) plans, savings incentive match plans for employees (SIMPLE IRA), and money purchase plans.
SEPs1 are one of the most common retirement options for 1099 workers. According to the IRS, contractors can contribute up to 25% of their net earnings up to $61,000 for 2022 in a SEP. To establish a SEP, complete Form 5305-SEP from the IRS or use a plan offered by a bank or other institution. Contractors can then set up a SEP-IRA.
Contractors can also set up their own individual 401(k) plan2 by contributing up to 25% of their net earnings up to $66,000 for 2023. This works the same way as an employer-sponsored 401(k) plan.
There's also a SIMPLE IRA plan available for contractors. Workers can set up a SIMPLE IRA between January 1 and October 1 by completing Form 5305-SIMPLE or Form 3504-SIMPLE and opening an IRA through a bank or financial institution.
Employers can contribute to a 1099 employee's SEP or SIMPLE IRA. With a SIMPLE IRA, employers can contribute 2% of their employee's compensation up to $305,000 or match employee contributions up to 3% of their compensation.
Health benefits for 1099 employees
A health benefit is one of the most popular benefit options for 1099 employees. While contractors have the opportunity to purchase self-employed health insurance, offering a health benefit can be advantageous. You have a few health insurance options if you want to give your contractors health coverage.
Group health insurance
One of the most common questions business owners have regarding employee benefits is, "Can I offer group health coverage to an independent contractor?"
Yes, you can offer health insurance coverage for 1099 employees. Employers can offer independent contractors the same group health insurance plan as their full-time employees. If you have many 1099 employees, this can help you increase your group health plan headcount and decrease your insurance premium costs per employee. Just keep in mind that some group health insurance providers won't allow you to include contractors in your group policy.
If your insurance company doesn't allow you to add 1099 employees to your health insurance plan, there are plenty of alternative health benefit options.
Health reimbursement arrangement (HRA)
You can also offer your W-2 employees a health reimbursement arrangement (HRA). These tax-free reimbursements give your employees the freedom to choose what healthcare expenses they want to have reimbursed. This includes health insurance premiums and eligible medical expenses.
While your 1099 employees wouldn't be eligible to receive a tax-free reimbursement through an HRA, they would legally be able to use the reimbursement as a taxable stipend.
You can also provide your 1099 employees with a health stipend benefit. With an employee stipend for healthcare, you can reimburse individual contractors for their medical expenses up to your set monthly allowance. With a taxable health stipend, your contractors must report their reimbursements as income on their tax returns.
A health stipend allows your independent contractors to purchase their own individual health insurance plan and get reimbursed for monthly premiums and out-of-pocket expenses. This gives them the flexibility they desire while enabling them to remain independent.
Health stipends can also benefit your W-2 employees who receive premium tax credits, as they'll be able to take advantage of both the health stipend and their federal tax credits.
Wellness benefits are one of the most-requested employee benefits, but they're often overlooked. According to MetLife3, employee wellbeing is expected to have the biggest impact on workplaces.
Wellness benefits aren't the same as health benefits. Instead of focusing on healthcare, a wellness benefit supports employees' physical and mental wellbeing, allowing them to focus more and increase productivity in the workplace.
With a wellness stipend, you can offer all of your employees, both W-2 and self-employed contractors, a monthly allowance for their wellness expenses. This includes reimbursement for gym memberships, meditation and sleep apps, yoga classes, and more.
Remote work benefits
Independent contractors and freelance workers generally work from home or in their own office space. It's normal for contractors to use their own equipment to complete their work for your organization. However, giving your 1099 employees a remote work stipend can be beneficial if your work is highly specialized or requires more resources.
A remote work stipend allows you to reimburse your 1099 employees for their home office set-up costs associated with your business and helps them pay for their internet access and phone bills. This helps ensure that your 1099 employees are set up for success on your projects.
You can also offer a remote work stipend to any W-2 employees who work from home!
While 1099 employee benefits aren't required, they can help your organization attract and retain independent contractors, even in highly competitive job markets.
Some of the top employee benefits for contractors are wellness programs, retirement plans, health benefits, and remote work stipends. Offering your contract workers an employee stipend is the best way to provide flexibility and independence in your benefits package.
Are you ready to start offering flexible employee benefits to your contract workforce? PeopleKeep makes setting up your benefits easy and hassle-free. Our employee stipend administration software makes it easy for organizations to provide reimbursable perks to their employees and 1099 contractors.
This blog article was originally published on April 6, 2022. It was last updated on November 10, 2022.