Payroll & Tax
A more demanding business environment and tightening profit margins have encouraged many companies to move towards freelance arrangements,
The working relationship between businesses and their employees is changing. The range of skills a business needs to remain competitive in the modern high-tech world is growing, which means businesses have branched out to work with more freelancers. One report suggested the number of businesses hiring freelancers had grown by 260% between 2022 and 2024.
Indeed, for some companies, freelancing has become the norm, leading to the rise of what, in the US, is often termed as 1099 companies. These businesses work with a predominantly freelance workforce. It saves them money and provides access to people with the skills and experience they need to tackle the multiple challenges of the modern business environment. However, when it comes to paying 1099 employees, your business needs to ensure that the working relationship satisfies all the requirements of the regulations.
What is a 1099 employee?
The term 1099 employees comes from the USA and refers to the form businesses must fill in for any contractors who earn more than $600 in a year. It’s intended to capture working relationships that extend beyond a single contract and become more regular and routine.
Changes to working culture have seen a steep rise in the number of people working freelance over the past few years. This is driven by changing requirements of companies, a desire for a better work/life balance, and advances in technology that allow for more footloose remote working relationships. It gives workers the chance for more freedom and to work across multiple clients, and it offers businesses a way to optimise their workforce. Working with freelancers allows businesses to access specialist skills when needed, such as if they are building a new software platform or website.
A more global business environment also allows businesses to seek out freelancers in other countries, such as South Africa. These new markets increase the availability of skills across all sectors, from customer service to financial management, IT and much more. Lower labour costs enable smaller and medium-sized businesses to bring advanced skills into their business on a more cost-effective basis.
For a small but growing number of businesses, working with freelancers has become their standard model, with individual contractors replacing employees. This makes sense because it allows them to avoid the cost of managing PAYE and providing ongoing employee benefits. In the US, these so-called 1099 companies highlight the shift towards a more casual, flexible workforce. It’s a shift that is causing disruption in the business world and uncertainty in regulatory circles.
Paying 1099 companies
The challenge for these 1099 companies is understanding how such workers should be classified and making sure they don’t fall afoul of the tax authorities. Governments across the world have moved to counter practices of disguised employment in which companies attempt to present employees as contractors in an attempt to avoid employer-side tax.
Penalties for non-compliance can be high, with criminal prosecution becoming a possibility for any business deemed to be intentionally misclassifying workers and repeat offenders. If you choose to go down the 1099 route, therefore, you need to ensure the relationship is handled correctly, from how workers are paid to how tax liabilities are settled.
The payment of 1099 employees is far more straightforward than traditional employees. Whenever a freelancer earns more than $600 per year, the business must file a 1099 form with the IRS.
The freelancer will then complete each assignment and file an invoice with the company. This will be settled on pre-arranged payment terms between the company and the freelancer.
Payment can come through any one of a range of options depending on the freelancer’s preference, location, or financial situation. Common channels include bank transfers or payment platforms such as PayPal. These can be quick, simple, and in most cases instant, although PayPal does come with a fee.
When working with freelancers through a freelance platform such as Upwork, the hiring company generally pays the platform, which then pays the freelancer after deducting a fee.
Working with freelancers in foreign countries can be more complicated. International bank transfers are becoming quicker and more affordable. However, these can take several days depending on the bank involved. Money transfer sites such as Wise also offer fast services with cheaper fees and more favourable exchange rates.
Whatever the chosen options, it’s important to settle payments promptly and to maintain transparency with the regulators to ensure you are seen to be doing everything you can to comply with the rules.
Employees versus freelancers
When working relationships with contractors become more ongoing, the line between freelancer and contractor can become ill-defined. From the authorities’ perspective, a contractor is someone who has autonomy over their working conditions, such as time and hours. Work assignments must take into account the freelancer’s availability, and payment should be on a project-by-project basis.
An employee should be someone who works for a salary paid out regularly, regardless of what work is or isn’t done. Working hours are set as are working locations, be it home working, hybrid working, or fully office-based. When assigning work, the company sets the deadline for each assignment, with the employee having to work to strict schedules.
Any workers whose routine working patterns resemble the latter example rather than the first should be classified as employees. The company should put them on payroll, pay employer-side taxes, and make sure they comply with all labour laws.
When the working relationship becomes more ambiguous, it can be worth hiring the services of a specialist intermediary such as an Agent of Record (AOR). These are used to manage teams of freelancers. They handle all the details, such as onboarding, background checks, and payment of invoices, and offer advice about how each worker should be classified. They can be particularly useful when hiring freelancers in foreign countries in which the regulatory environment might be unfamiliar.
The specialist expertise of the AOR can give you professional advice about all classification questions and ensure you stay on the right side of the law at all times. They can review ongoing relationships and let you know when the time has come to move contractors into full-time employment.
Working with freelancers gives businesses much more flexibility in terms of cost and access to skills. However, it also complicates compliance management. Working with supporting companies such as AORs can keep you on the right side of the law and avoid the risk of unintentional compliance problems.