What Is a 1099?
A 1099 is an IRS form that states how much was paid to an independent contractor for the year. A business pays employees a salary or hourly wage and withholds taxes and benefits. This information is reported on a form W-2 to the IRS. However, when a business pays an independent contractor, no taxes or benefits are withheld. The bookkeeper simply adds up what was paid to the contractor during that year and sends them a form 1099. The business is also responsible for sending copies of the 1099s to the IRS. The taxes are paid by the independent contractor himself, either quarterly or at the end of the year when income taxes are prepared.
What Constitutes Being an Independent Contractor?
Independent contractors are considered self-employed workers. The main area the IRS looks at to qualify an independent contractor status is whose control the contractor is under. This is then broken down into three separate areas: financial, behavioral and relational. The company an independent contractor is doing work for cannot pay benefits, such as health insurance or a retirement plan. The company will not take federal, state or local withholding taxes from pay, although some agreed upon deductions are allowed. An independent contractor cannot be told how many hours he has to work or when those hours must be. Of course, there are cases where a contractor can only access the place of business at certain times. Contractor cannot be made to go to training classes provided by the hiring business or be told exactly how to do the job. As an independent contractor, you would most likely agree to certain standards before accepting the job.
The relationship aspect is more difficult to define. Normally, there is a contract written between the contractor and the company he is to preform work for. The contract creates an understanding that the work is being done according to the contract and may not be a permanent job. In most cases, the contract also states the contractor has the authority to work for someone else doing the same type of work.
Pros and Cons of Being an Independent Contractor
When the independent contractor files his taxes at the end of the year, he files as self-employed. This gives him the benefits of writing off many more expenses than an employee. Within certain limits, the independent contractor can make her own schedule and perform the work the way she wants to. Most independent contractors make more money per hour of work than employees. However, they are responsible for their own profits and losses. They normally must supply their own materials, and most have to be licensed with the state or county where they work, which usually requires testing and expenses. They cannot participate in a company-subsidized retirement plan or health insurance plan. Anyone who plans to become an independent contractor needs to take all of these things into consideration before deciding if it's right for you.
- Tax filing gone wrong: this accountant has had enough. image by Alexey Stiop from Fotolia.com