You've got a can of worms with the 1099 thing. Unless you have a specific contract with him on non-compete/non-disclosure with reasonable limits and teeth (check your state laws), you might be in for some pain.

Also, if you think he only talks to you like that, you're mistaken. Rest assured that he talks the same way to your other employees (contractors) and customers.

Start transitioning the accounts he works on to other techs and ween them off of this guy. Make sure you take care of the good customers.

With no overhead, he can come in at $50/hr and they'll pay it in a heartbeat.