A 1099 contractor is a legal and tax term used in the United States to refer to the type of worker who contracts out their services to one or more companies. These entrepreneurs exist in multiple fields – from hospital planners and marketing consultants to construction contractors and freelance writers. The “1099” refers to the Internal Revenue Service (IRS) form that an independent contractor receives showing their income from a particular business in a particular tax year. A 1099 contractor is not an employee of the company or companies they work with; rather, it is an independent contractor, or consultant, who is considered self-employed. Like most freelancers,
The 1099 contractor is generally not protected by minimum wage laws; in fact, some independent contractors work below minimum wage. Its payment is usually assessed by the completion of a job, not by hours worked – when a job takes longer than expected, earnings can fall below minimum wage. On the other hand, a qualified independent contractor can work for a salary well above the minimum wage, especially those who have expertise in a specific field and work as a consultant.
When balancing the trade-offs between working as a 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 benefits are offered to them. As a result, the payment plan for most of these workers requires more independence and accountability, as things like medical and dental benefits, savings to cover future sick and vacation days, and obligations taxes are solely the responsibility of the worker.
1099 entrepreneurs who earn 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 earnings, and independent contractors must do the same; the difference is that employers generally withhold taxes on behalf of the employee, while 1099 contractors are responsible for their payments. Additionally, employers typically cover half of total Social Security and Medicare taxes – a tax of 15% of net income in 2011 – meaning the employer covers 7.5% on behalf of the employee. ; independent contractors are usually liable for the entire amount.
Since an independent contractor is considered self-employed, they are essentially 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 typically have estimated tax liabilities withheld from each paycheck, but this is not done for a 1099 contractor. However, most self-employed people are required to make quarterly installment payments based on their expected tax responsibilities. for the year.
Certain deductions may be made to reduce tax liability, including work-related expenses, such as home office expenses and vehicle expenses if the office and car are used for business purposes. A computer purchased to work as an independent contractor, for example, maybe deductible from the person’s net income. Entrepreneurs should keep all relevant business receipts for the year to report as business expenses.
Advantages and disadvantages
The independent contractor typically has scheduling advantages over the employee — often they’re not limited to the typical nine-to-five-day, Monday-Friday work week like the average employee. Deadlines, of course, can restrict the independent contractor’s work schedule. On the other hand, he usually doesn’t get the benefits that employees often receive, such as paid time off, whether for illness or recreation.
Additionally, the legal implications for an independent contractor are different from those for an employee, and these implications can vary significantly depending on the specific contractual terms between the contractor and the customer or company. In many cases, the 1099 contractor can be terminated at will, with or without cause. Additionally, he is generally responsible for his health insurance and retirement benefits, as the companies he worked for have no obligation to provide benefits.