From the Star Tribune, Kevin Henderson provides excellent advice in response to a question about providing benefits to 1099 workers/independent contractors. The question can arise when a company starts by engaging with independent contractors to provide services and later, when, the company grows or is more profitable, the company, with nothing but good intentions, wants to share the wealth and provide additional benefits to the independent contractors. It is nearly impossible to provide benefits to an independent contractor without risking an allegation that the worker was misclassified. Kevin does an excellent job answering the question. Kevin writes:
A: One caveat to the advice I’m about to share is that I would strongly encourage you to get financial and/or legal counsel before proceeding. I am neither a CPA nor lawyer, and there could be significant tax/legal repercussions for your business if you do anything that might cause the IRS to believe that your 1099 workers should actually be classified as employees.
With that being said, the short answer to your question is “not much.” If you review the IRS guidelines online, they note three common law categories associated with determining whether an individual is an employee (W2) or independent contractor (1099). I would strongly encourage you to review the entire website, but the category that relates most to your question is “Type of Relationship.” This section notes that benefits are typically provided to employees only, which would include insurance, paid time off and pension plans. It also references the permanency of the relationship, which, as I interpret it, states that you should not give any reassurances that the relationship will continue indefinitely, like you typically would for an employee. This would suggest that you cannot offer job security past the specific project (or period) for which you hired the 1099 worker.
Another resource, the Association of Corporate Counsel, recommends avoiding any appearance of employee status for 1099 workers, as doing so could cause the IRS to believe they are actually employees.
Based on all of this, I would recommend not offering any more benefits or security than you already do, assuming you want to keep these workers on 1099 status. Should you decide you want to offer more benefits and job security, you can hire them on as employees, but note that you would then have to pay payroll, Social Security and unemployment taxes, in addition to offering whatever benefits you wanted to provide.