Continuing from our previous blog on Contractor vs. Employee: Understanding the Key Differences, this blog addresses the most frequently asked questions surrounding classification, unemployment, and workers' compensation.

1. Can a 1099 employee collect unemployment?

According to IRS classification standards, a 1099 worker is not an employee, but an independent contractor. Because of this:

• 1099 contractors do not have unemployment insurance taxes withheld or paid on their behalf.

• 1099 contractors are not eligible for regular state unemployment benefits, as they are considered self-employed.

Only in special government relief programs (like the Pandemic Unemployment Assistance) could 1099 workers temporarily qualify.

2. Can contractors file for unemployment?

No, not under regular circumstances.
The IRS treats contractors as self-employed individuals. They:

• Do not contribute to state unemployment insurance (UI). Therefore, cannot file for unemployment through traditional state systems.

Exception: If a contractor was misclassified and actually functioned as an employee (per IRS guidelines), they can appeal and request reclassification through their state unemployment agency. This may make them eligible for benefits retroactively.

3. Can I get unemployment as a contractor?

Generally, no.
Unless you meet the IRS definition of an employee and can prove misclassification, or are covered by a special federal/state relief program, contractors are not covered by unemployment insurance systems.

IRS rule of thumb:

"If the payer has the right to control or direct only the result of the work and not how or what will be done, the worker is an independent contractor."

So if you’re truly a contractor under IRS rules, you cannot collect unemployment in normal conditions.

4. Do 1099 employees get workers’ compensation?

No, not by default.
A 1099 worker is an independent contractor, and employers are not required to provide workers’ compensation coverage for them under normal circumstances.

• Since independent contractors are not considered employees, they are responsible for obtaining their own workers’ comp insurance if desired or required by law or contract.

• Employers are only liable for workers’ comp if the contractor was misclassified and actually functioned like an employee.

5. Can a 1099 employee be covered by workers’ compensation?

Yes, but only if:

• The contractor carries their own policy; or

• The employer elects to cover them voluntarily; or

• The state mandates coverage based on industry type, level of control, or misclassification findings.

So while they’re not automatically covered, it is possible if structured intentionally or required by law.

6. Do I need workers’ comp for independent contractors?

Legally,  usually not. But it depends.
In most states, you don’t have to cover true independent contractors. However:

• If your contractor is uninsured and suffers a work-related injury, your business may become liable if they’re reclassified as an employee.

• Some industries (like construction) may require all workers, including 1099s, to be covered under workers' comp, by law or contract.

To protect your business, many companies:

• Require contractors to carry their own workers’ comp; and

• Collect a Certificate of Insurance (COI) to document proof.

7. How to Set Up a 1099 Business?

A “1099 business” refers to operating as a self-employed individual who receives IRS Form 1099-NEC for income instead of a W-2.

Steps to start:

• Choose a business structure:
  You can operate as a sole proprietor (simplest) or form an LLC (adds legal protection and professionalism).

• Register a business name (DBA):
  If using a name other than your legal name, register a “Doing Business As” with your state or county.

• Get an EIN (Employer Identification Number):
  Optional for sole proprietors, but required for LLCs, those with employees, or if you want to keep your SSN private.

• Open a separate business bank account:
  Keeps finances clear for tax and record-keeping purposes.

• Track all income and expenses:
  Use software or a spreadsheet to log all payments received (1099s) and business-related spending.

8. Do I Need an EIN as an Independent Contractor?

Not always, but often recommended.

You need an EIN if:

• You operate as an LLC or partnership

• You hire employees

• You want to file certain federal business taxes

• You prefer to avoid using your SSN on forms sent to clients or the IRS

You don’t need an EIN if:

• You are a sole proprietor with no employees

• You’re comfortable using your Social Security Number (SSN) for business tax reporting

You can apply online through the IRS website for free.

9. Setting Up an LLC for Contract Work

Creating an LLC (Limited Liability Company) provides structure and protection for your contract work.

Basic setup process:

1. Choose a business name (check availability in your state)

2. File Articles of Organization with your state’s business office

3. Designate a registered agent

4. Draft an Operating Agreement (required in some states)

5. Apply for an EIN through the IRS

6. Obtain state and local licenses if needed

Benefits of forming an LLC:

• Limits your personal liability
• Adds trust and professionalism when dealing with clients
• Offers flexible tax treatment (you can elect to be taxed as a sole proprietor, partnership, or S Corporation

• Limits your personal liability

• Adds trust and professionalism when dealing with clients

• Offers flexible tax treatment (you can elect to be taxed as a sole proprietor, partnership, or S Corporation)