Updated July 7, 2020:

A 1099 sales rep agreement is important to have for companies that employ sales representatives. It can be the difference between staying open and being forced to shut down the company. Employees who only get commissions are called 1099ers due to the 1099-MISC form that they receive every year. This is different from the W-2 forms that salaried and hourly employees get.

What are Independent 1099 Sales Representatives?

A legal contractor is someone who does the following:

  • Controls when and how customers are seen.
  • Pays expenses without getting reimbursed.
  • Contract with company states they're an independent contractor.

There are certain rules the IRS sets that sales representatives must follow. They are considered employees if they work full time for the business, obtain sales orders that are given to the company for fulfillment, sell goods to customers to be resold, sell to contractors or the hospitality industry, perform most of their sales personally, and don't have an investment in the company but have an ongoing relationship with the business. If these requirements are met by the employee, the business must withhold federal and state taxes and match Social Security and Medicare withholding.

Should the IRS decide that the independent sales representative is an employee, the U.S. tax code provides protection from paying matching Social Security and Medicare taxes for that year, as well as from paying penalties. In order to qualify, the company must not have a W-2 employee doing identical tasks to the contractor, must consider the person to be an independent contractor for the whole tax year, have a good reason for considering the person to be a contractor versus an employee, and treat him or her like a contractor for all the tax filings.

Common reasons for considering a sales rep to be a contractor is a court ruling that makes you believe the classification is correct, a recognized classification in the industry, or a previous tax audit. The contract with the independent sales rep is the best way to show that the person is an independent contractor. The document should state that the sales rep is a contractor and spell out what he or she does, how often and how much he or she is paid, and provide a definition of how commission is paid out, such as getting 15 percent of each sale.

How to Work With Independent Sales Representatives

It's tough when a business wants to market a new product quickly, but is on a budget that's tight. It takes money and time to put together a sales team, so how can a company get around those issues? One option is to work with independent sales representatives, also known as manufacturers' agents or representatives. They sell services and products directly to customers for the company they work for. When hiring a salesperson, there isn't any initial risk with the representative until he starts bringing in revenue. This is because the company isn't in charge of the rep's retirement or health benefits.

This is a good way to test out the market and see how a product will benefit from a demonstration. The representative will also help if there needs to be a continuous explanation of the new products. For this reason, independent representatives mainly work for wholesalers, technical companies, and manufacturers. They can be used as a way to decrease costs and increase sales over the phone or get into new territories and markets.

How to Find Sales Representatives

It's not always easy to find someone who represents the exact needs of the business and produces quality work. Not every representative will produce high numbers, so keep that in mind. The best method is to have people working in different locations to get the most out of the sales initiative. Once potential representatives are found, they should then sign an independent sales rep agreement, since they're not employees of the company.

This will make sure there are no misunderstandings between either the representative or the company. Negotiating the pay rate is the first thing most people will tackle to make sure they're on the same page from the start.

If you need help with a 1099 sales rep agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.