Pros and Cons of Being a 1099 Employee

A Note on Terminology: A “1099 employee” is not the correct terminology, but we use it several times here to ensure that those who need to find it do. “1099” refers to independent contractor status, while an “employee” operates through a W-2 rather than a 1099. These represent two different classifications of workers, the third being volunteers.

The following table details the pros and cons of being a 1099 worker. For easy analysis, we split our evaluation into major categories concerning contractors (e.g., job security, freedom, taxes) and include summaries of pros and cons. 

The Pros and Cons of Being a 1099 worker

	Pros	Cons
Job Security	Typically protected by contract	No guarantee of contract renewals
Taxes	More opportunities for exemptions, etc	Have to calculate, track, and file yourself
Payment	The contractor sets their own rates	Heavier taxation rate
Workplace	The contractor determines the workplace	Often siloed from employees
Freedom	The contractor determines how work is done	You are responsible for the work

The sections below provide a more in-depth look at the categories discussed in the table above to provide more clarity. In addition, we provide suggestions for workers considering the pros and cons of being a 1099 worker to get started. 

1. Job Security

1099 contractors typically operate on a by-project basis, which offers a true double-edged sword in terms of job security. 

• On one hand, contractors have greater job security for the duration of the contract. Many employees provide work under an “at-will” employment status; this means that an employer can terminate an employee at any time for any reason. By contrast, contractors are protected by the terms of the contract, which typically has a carefully worded termination clause. 
• On the other hand, contractors have virtually no job security at all once the contract is completed. It is entirely up to the employer whether they want to continue working with them at that point, meaning that contractors can often find themselves completely without work very quickly.

This means that contractors face a greater level of pressure to foster client relationships and ensure that clients are satisfied with the work being delivered to better forecast their future labor needs. 

2. Taxes

Independent contractors are responsible for calculating and paying their taxes. On its face, this is both a greater responsibility and a higher level of taxes being paid: 

1099 Contractor vs W-2 Employee: Taxes

Tax Type	W-2 Employee	1099 Contractor
Social Security	6.2% of wages	12.4% of net earnings
Medicare	1.45% of wages	2.9% of net earnings
State Income Tax	Withheld (if applicable)	Paid directly (if applicable)
Federal Income Tax	Withheld from paycheck	Paid directly
Tax Withholding	Automatic	Quarterly payments
Total FICA/Self-Employment Tax	7.65%	15.3%

That being said, independent contractors also have the opportunity to claim extensive deductions and exemptions on their taxes, which are not available to W-2 employees. A non-comprehensive list of these exemptions includes: 

1099 Contractor Tax Deductions

Deduction Type	Total Amount Saved	How to Qualify
Self-Employment Tax Deduction	Reduces taxable income by half of your SE tax	Pay self-employment tax; claim on Schedule 1 and Schedule SE
Home Office Deduction	Up to $1,500 (simplified) or % of actual costs	Use part of home regularly & exclusively for business; claim on Form 8829/Schedule C
Phone & Internet	Business-use portion only	Must be used for business; deduct only business portion; keep records
Business Supplies/Equipment	100% if used for business	Must be ordinary/necessary for business; keep receipts
Business Travel & Meals	All business travel, 50% of meals	Travel must be for business; keep detailed records/receipts
Health Insurance Premiums	100% of premiums paid	Must not be eligible for employer plan; self-employed; claim on Form 1040

It is the contractor’s responsibility to manage filing these things on their own, which is often the sticking point for workers considering 1099 status but not wanting to do that much labor to profit.

3. Payment

1099 contractors are typically paid on a per-contract basis, sometimes metered out as they hit agreed-upon milestones. For example, a writer might be paid upon delivery of a rough draft, another percentage when they complete initial edits, and the final portion when the article is published. 

The exact rate is determined by the contractor themselves, but is often based on existing benchmarks based on relative experience and the industry in which they work. The graph below provides a few rough averages: 

Similar to their relationship with taxes, benefitting from the higher wages that a 1099 contractor can earn requires a great deal of effort to assess your own abilities even while you negotiate with new prospective employers. Workers who see this as an opportunity rather than a liability may be well-suited for a career as freelancers.

4. Workplace

Contractors and freelancers determine the conditions under which they work. In order to save costs, many choose to work from home where possible, often resulting in a more casual work environment. This can mean, however, that they are less connected to the rest of an employer’s employees, which can lead to potential issues with communication and transparency that the contractor will need to negotiate. 

5. Freedom

One of the biggest draws for prospective contractors is the ability to determine their own schedule and negotiate the terms under which they work. 

Contractors perform their job according to their own ability, having to abide only by the stipulations of the contract as an external guide, but otherwise, they are completely free to work however they please.

While this is seen as a boon by most people, the reality is that operating as a 1099 contractor means operating without a safety net; at the end of the day, you are responsible for the work you contract out. 

Fail to perform up to par with the client’s expectations (e.g., turning in late or unsatisfactory work, being unavailable for contact, having unpleasant interactions with a client), and they will likely cut you loose.

Is it Better to be a W-2 Employee? 

If you are reading through the pros and cons of a 1099 and paying more attention to the cons, employee status might seem more appropriate. Many workers select this lifestyle because of the ease it provides, but it also comes with disadvantages:

1099 Contractor vs W-2 Employee: Pros and Cons

	1099 Contractor	W-2 Employee
Pros	Control over when and how work is done	Higher job security
	More opportunities for tax exemptions, etc	Employer handles taxes & benefits
Cons	Lower job security	No control over job conditions
	Have to file taxes yourself	Income is determined by the employer
Best For Workers who Value…	Freedom, control, profit	Security, consistency, simplicity

Still Unsure?

The reality is that for all of the pros and cons of being a 1099 employee, there isn’t really a “right” decision. There’s only what’s right for you. 

Often, we find that one of the biggest things holding workers back from embracing a 1099 lifestyle is the lack of tools to help manage what effectively becomes your own business. 
These services can be hard to find, but they do exist; Payoneer WorkForce management, for example, provides freelance services that allow you to more easily create and send invoices, track your finances, and interact with online marketplaces all through scalable plans that allow you to start small and upgrade as needed. Click the link below to learn more about what Payoneer can do for you.