Employment Cost
1099 companies rely on freelancers and contractors rather than employees, and can be a good way to optimise business costs.
The world of work is changing with more companies looking at innovative and non-standard ways of working and talent sourcing. With the range of skills required within businesses diversifying, many businesses are looking to switch from a model based on full-time employment to one based on working with freelancers. In the US, this breed of company is becoming known as a 1099 company. They offer a way to access a wider range of skills while also reducing operating costs. However, they can also cause friction wth the regulators. If you decide to go down that route, therefore, it pays to make sure you stay on the right side of official regulations.
What is a 1099 company?
The term 1099 is most commonly associated with companies in the US. It stems from a 1099 form that companies must fill in for any freelance contractors who earn more than $600 within a financial year. Such employees tend to be contractors who have regular or semi-regular relationships with businesses that go beyond single one-off projects.
So-called 1099 companies have extended the freelance model to the extent that they predominantly work with contractors rather than full-time employees. The company hires the employee without putting them on payroll.
This has obvious benefits for the company involved. It’s cheaper and easier without the need to withhold tax or process the usual admin associated with hiring employees. It’s also a whole lot more flexible, with companies being able to scale their requirements up or down as needed.
1099 companies may also offer the services of freelancers to other companies. Examples include Upwork of Fiverr, which give their clients a chance to connect with freelancers across a range of professionals. In this instance, the company serves as an intermediary between the hiring company and the freelancer. Communication is managed through the platform, with the hiring company paying Upwork, which then pays the freelancer. The intermediary makes money by charging service fees to both the freelancer and the hiring company.
The relationship can also work well for the contractor, who will have more freedom and flexibility in their work. They have greater independence and are free to work with other companies. With the hiring company saving money on payroll requirements, the contractor may be able to command a slightly higher hourly rate. As an independent contractor, they can also deduct legitimate business costs from their tax liabilities, such as travel expenses or some utilities.
How 1099 workers are paid
To pay 1099 contractors, the contractor will have to hire out an IRS form W-9, which includes their legal name, address, and taxpayer identification number. The company will then use this when filing a 1099-NEC form with the tax authorities. The contractor should also receive a copy of the form.
The mechanics of payment will normally be by arrangement with the contractor, such as bank transfer, payment apps, checks, or even cryptocurrency. You may also offer a selection of payment options depending on the individual preference of each freelancer. The contractor will then settle his or her tax affairs directly with the authorities.
1099 companies in South Africa
The concept of a 1099 company is most commonly termed in the US. There is no official direct example in South Africa, but there are many companies that work in a similar way, with people being shifted from full-time employment towards more flexible freelance arrangements.
Foreign companies in Europe and elsewhere are also tapping the freelance market in South Africa to deepen their talent pool. The country’s low cost of labour makes it an attractive proposition for businesses looking to reduce their overall operating costs without missing out on the latest talent.
Freelancers give companies flexibility to access people with certain specialist skills as and when they are needed. However, many are looking to save money by shifting roles that used to be performed by their employees onto contractors. However, this approach can create additional complexity and compliance risks.
The lines between full-time employees and freelancers are becoming increasingly blurred. The rise of remote work means the employee-employer relationship is becoming much more flexible and fluid, with people regularly spending part or all of their time working from home.
Likewise, freelancers can engage more regularly with companies to the extent that they quickly start to resemble full-time employees. When businesses have ongoing requirements, freelancers can find themselves working virtually full time. For example, if a company hired a designer to work on a web launch, they might gradually start to use them for their more regular ongoing requirements.
However, it’s at this point that problems with the regulators can arise. The more regular the work with freelancers becomes, the more the line between freelance and employee blurs. Authorities have become highly sensitive to issues of so-called disguised employment in which companies attempt to present defacto employees as freelancers in an attempt to avoid the costs of managing PAYE, employee benefits, and employer-side taxes. Penalties can be quite high, and in repeat offenses and cases in which the authorities believe the offense is intentional, can lead to criminal prosecution. Understanding where the line should be drawn, therefore, should be seen as a case of critical importance.
To help draw that line, many companies engage the services of an Agent of Record or an Employer of Record. An AOR manages the classification of your freelancer and oversees tasks such as payment, onboarding, and background checks. Their expertise can provide advice on worker classification to make sure you know when someone should be classed as an employee or contractor. When the time comes to progress to a full-time employment model, you can work with an Employer of Record. The EOR will serve as the legal employer of your workers and will handle all HR responsibilities, including withholding tax, providing employee benefits, and all employer taxes. They ensure the authorities receive payments on time and that all reports are filed in the required formats.
EORs and AORs can help manage an increasingly unconventional working environment in which companies may engage with professionals across many contract types. In a world in which agility is everything, 1099 companies can help you respond more proactively to the challenges coming your way and maintain compliance with all employment laws.
