A 1099 contractor is a self-employed worker who contracts their services to businesses and is not considered an employee. They are responsible for their own taxes and typically do not receive employee benefits. Compensation is based on completed jobs, and there are advantages and disadvantages to being an independent contractor.
A 1099 contractor is a legal and tax term used in the United States to refer to the type of worker who contracts their services to a business or businesses. These contractors exist in multiple industries: from hospital planners, to marketing consultants, to building contractors, to freelance writers. The “1099” refers to the Internal Revenue Service (IRS) form that an independent contractor receives stating their income from a particular business during a particular tax year. A 1099 contractor is not an employee of the company or businesses with which he works; instead it is an independent contractor, or consultant, who is considered self-employed. Like most self-employed workers, they typically do not receive employee benefits, such as health insurance or retirement benefits, but may have more flexible working hours and locations.
compensation
The 1099 contractor is usually not protected by minimum wage laws; in fact, some independent contractors work below minimum wage. His payment is generally assessed by the completion of a job, not the hours worked – when a job takes longer than expected, income can fall below the minimum wage. On the flip side, a skilled independent contractor can work for far above the minimum wage, particularly those who have experience in a specific field and work on a consultancy basis.
In balancing the trade-offs between working as a 1099 contractor or an employee, perhaps the most important consideration should be how the worker is compensated for their services. In a typical scenario, independent contractors are not paid until the service is fully completed and no type of labor allowance is offered. As a result, the payment regime for most of these workers requires more independence and accountability, as medical and dental benefits, savings to cover future sick days and holidays, as well as tax obligations are only within the scope of competence of the worker.
Tax differences
1099 contractors who make more than a certain amount per year receive 1099 forms from the company or companies that paid them. Regular employees must pay income and Social Security taxes on their income, and independent contractors must do likewise; the difference is that employers generally withhold taxes on behalf of the employee, while 1099 contractors are responsible for their own payments. Additionally, employers typically cover half of total Social Security and Medicare taxes — a 15% net income tax in 2011 — meaning the employer covers 7.5% on behalf of the employee. ; independent contractors are typically responsible for the full amount.
Because an independent contractor is considered to be self-employed, they are essentially both the employer and the employee; therefore, he is responsible for withholding his taxes and paying the full amount of Social Security and Medicare taxes. Regular employees usually have an estimated tax liability withheld from each paycheck, but this is not done for a 1099 contractor. However, most self-employed workers are required to make quarterly installments against their expected tax liabilities for the year.
There are some deductions that can be made to reduce your tax obligations, including work-related expenses, such as home office costs and vehicle costs, if the office and car are used for a business purpose. A computer purchased to work as an independent contractor, for example, may be deductible from the person’s net income. Contractors should save all relevant business revenue for the year in order to claim it as a business expense.
Advantages and disadvantages
The independent contractor generally has scheduling advantages over the clerk – often, they are not limited to the typical nine-to-five workday and Monday-Friday workweek like the average clerk. Deadlines, of course, can limit the independent contractor’s work schedule. On the other hand, he generally doesn’t get the benefits that employees often get, such as time off with pay, whether it’s sickness or pleasure.
Additionally, there are different legal implications for an independent contractor versus an employee, and these implications can vary widely based on the specific contractual terms between the contractor and the client or business. In many cases, the 1099 contractor can be resigned at will, with or without cause. In addition, he is usually responsible for his own health insurance and retirement benefits, as the companies he has worked for are not obligated to provide benefits.
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