Checklist: Things To Consider When '1099ed'
Many businesses are now hiring independent contractors to perform functions previously carried out by salaried employees. This trend, of "1099" workers, by small businesses helps to reduce benefit costs and lower overhead. However, businesses are not permitted to arbitrarily select certain workers to pay as contractors versus employees. The IRS provides criteria defining the differences between an employee and a contractor, as well as when and how, salaried workers can be legally reclassified as freelancers.
In addition to the trend by many small businesses of "1099ing" workers, or contracting freelancers rather than hiring new employees, there is also a growing segment of people who, either through entrepreneurial zeal or to earn additional income, are now working side gigs, such as driving for Uber, or renting out rooms through Airbnb (see more here). Income earned through these activities is most often reported on a 1099.
Regardless of whether you're reclassified as a contractor, or earning additional income as a freelancer, the following list provides helpful information for all newly-minted "1099ers":
Confirm Your Employment Status
Employers often issue W-4s to new employees to help determine the correct withholding amount. FICA and Social Security taxes are then withheld from employee wages.
Those presented with W-9s are contractors, and will NOT have taxes withheld from any wages/income they earn. Instead, contractors will receive a 1099 at the end of the year and they are responsible for all taxes on these earnings. Make sure you understand your employment status and if you are considered an employee or contractor.
A 1099 From Each Company
If you were paid over $600 from a company during the span of a year, expect a 1099. If you worked for more than one company, expect a 1099 from each company you worked for. For some, this could mean receiving multiple 1099s every year.
Develop a Tax Strategy
A 1099 is, in many ways, a tax bill. Independent contractors are responsible for paying a 15.3 percent self-employment tax — FICA and Social Security — on the first $137,700 (for 2020) of net income, and 2.9 percent on net income above $137,300. Many contractors self-withhold income to ensure they cover tax liabilities and file taxes quarterly to avoid having to pay in a lump sum. 30 percent is often a good rule of thumb for this. Failure to pay quarterly can potentially cause the taxpayer to incur penalties and interest on their tax bill.
Learn To Deduct, Deduct, Deduct
Contractors may not be entitled to benefits, such as paid vacations, sick days, insurance, and 401(k)s, but since they are considered their own business, they can deduct a wide range of expenses employees cannot. Among other items, this may include business use of vehicle and an office in the home. This can reap huge savings, but requires careful documentation of expenses (retaining receipts, calculating business use portions of your bill and so forth).
Independent contractors hired to do jobs often performed by salaried employees are frequently paid more because, among other things, they are now responsible for withdrawing their own taxes and financing their own benefits. Newly minted 1099 contractors should also understand that the status may make it difficult to qualify for loans or credit until a track record is established.
Independent contractors should receive 1099s from income earned during the previous tax year no later than January 31.