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What Are the Tax Implications of Being a 1099 Contractor?

W-9 form, a type of tax form filed for freelance and contract employees.
The 1099 is an IRS form that an independent contractor receives stating her income from a given business during a given tax year.
2012 1099-misc form.
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  • Originally Written By: Tricia Ellis-Christensen
  • Revised By: Geri Terzo
  • Edited By: O. Wallace
  • Last Modified Date: 22 November 2014
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A 1099 contractor, also known as an independent contractor, is a classification assigned to certain U.S. workers. The "1099" reference identifies the tax form that businesses must file with the Internal Revenue Service (IRS), and it relieves the employer from the responsibility of withholding taxes from the individual's paychecks. Although independent contractors provide a service to an organization, they are not considered employees of the company. This shifts the burden of ensuring that income taxes are paid each year from the employer to the workers, provided that these individuals earn at least $600 US Dollars (USD) per year and are U.S. residents or citizens.

Which Taxes Must Be Paid?

As an independent contractor, an individual is basically self-employed. In addition to any state and federal income taxes, people who earn at least $400 US Dollars (USD) each year must pay self-employment taxes to help finance Social Security for retirement and Medicare for health-related benefits. The charge for these taxes varies, depending on person's income, but it's usually a percentage of what he or she earns.

How and When Are Taxes Paid?

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Considering that federal and state income taxes aren't automatically being deducted each pay period, the contractor must decide how to satisfy his tax obligation. In most cases, the person is required to make quarterly estimated payments based on the previous year's income to the IRS to avoid being hit with penalties and a high tax liability each year. To make the most of the tax money, an individual might take a portion of this amount out of his or her pay each month and deposit the money into a savings account until the taxes are due, allowing him or her to earn interest on the funds.

Quarterly estimated tax payments are typically due on 15 April, 15 June, 15 September, and 15 January of the following year. As with those who earn income as an employee, people who are self-employed must file their taxes and pay any additional money due by 15 April of the year after the money was earned.

If an independent contractor is one of the individuals filing a joint tax return — especially if the other individual is a full-time employee of a company — the couple could handle payments a little differently. If the person who is filing as an employee has overpaid his or her taxes throughout the year, that money, which would normally be returned as a tax refund, might instead need to be applied to any amount owed by the 1099 contractor. Some couples have actually worked this to their advantage, with the regular employee dropping his or her deductions so that a larger amount of tax is withheld than would normally be correct. The overpayment is then applied to the freelancer’s tax obligations.

What Are the Pros and Cons?

To offset some of the tax expense, someone who is self-employed can often take advantage of certain deductions that aren't necessarily available to the average employee. For instance, he may be able to write off a home office that's used exclusively for work, business supplies, and traveling expenses, in addition to work-related lunches, when appropriate. Doing this, though, typically means many more forms to file at the end of each tax year.

It's important that the individual be able to accurately document all of these expenses. Because some of these deductions are pretty easy to falsify — a home office is supposed to be used exclusively for business purposes, for example — people who file certain tax forms are more likely to be audited than others. Filling out all tax forms honestly and keeping good, accurate records is the best way for people to be prepared should the IRS ask questions.

In addition, there are some taxes that a 1099 contractor isn't required to pay. Most importantly, these workers aren't required to pay unemployment taxes, which are taxes paid by an employer on behalf of its employees, and are not deducted from the employees' paychecks. Since contractors aren't employees, they don't pay this money, which seems like a benefit that would puts more cash in the individual's pocket. This also means, however, that the individual is not entitled to collect unemployment benefits if he or she loses a contract or cannot find work.

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Discuss this Article

anon929823
Post 27

If I am a 1099 contractor for three months and a W2 for the rest of the year, should I still pay estimated taxes?

anon927338
Post 25

I was chosen to create some invitation design, mailer, ticket etc.. for a profit organization, but was only officially paid twice by them, withing different time frames within the same year. I didn't sign a contract with them; in fact, they had to sign one of mine. Seeing that I am freelance, I am not by contract or work for hire. It was an independent outreach by their organizer.

Now they are contacting me to fill out a 1099 for them. I am very unsure, and do not want to give out my social or any information to these people, seeing that I don't know if it is trustworthy. Am I required to do this even though it was only a temporary design for them?

anon926165
Post 24

Taxes are required after $400 of income in a calendar year through an independent contractor filing a 1099.

anon355201
Post 23

If you work 1099, then remember you can put money into your own 401K plan. Not limited like the normal IRA contribution. This 401K contribution means you won't pay taxes on that money ($17,500 this year + extra approx $6,000 if over 50), but of course you don't get a match. Vanguard has one for self-employed folks, with no fee (or maybe $20). Some day you will be old and will really appreciate the money you put away!

anon338087
Post 21

We are about to hire a person to help do remedial work on an electrical job. We only need this person for about four to six weeks. A person approached us and told us they would work on a 1099. Is this possible? And what paperwork do I need to hire this subcontractor?

anon325695
Post 20

If you work as a contractor part time 1099 and your income was about 6000, will you be responsible for a large tax due? This does not count any expenses for traveling or tools.

anon320127
Post 18

I have been a 1099 independent contractor for 15 years as a caregiver to an old lady. She is my employer. I voluntarily agreed to be a 1099 contractor. Now her trustee, who is her niece, is forcing me to change from a 1099 to a w2. My question is, can I decline and keep the 1099?

anon303930
Post 17

I was offered a 1099 contractor job for a three year IT project. They offered $50 per hour. I didn't realize I have to pay everything from my pay. I will be making over 100k. What percentage of money goes to taxes including social security and medicare? I don't think I can accept the job.

anon301707
Post 16

How much money can someone make before a 1099 is required?

kylee07drg
Post 15

If you are a 1099 independent contractor, do you have to pay quarterly estimated taxes, or can you wait until April 15 if you choose? I have some weeks where I make almost no money, so I would hate to wind up paying more in estimated taxes for one quarter than I actually owe. I might not be able to afford this.

StarJo
Post 14

@shell4life – I hold a 1099 contractor job, and last year, I discovered at tax time that I had not been putting aside enough of my payments. I had been putting 20% of each check in a savings account, but I ended up owing about 26%.

Luckily, my husband was getting a refund of $1500, so that helped cover the portion that I didn't set aside. This year, I've been calculating 26% of each paycheck, and I always round it up to the nearest dollar. I'm hoping that we might be able to use his refund this time for something other than paying my taxes, and if all goes as planned, we should.

shell4life
Post 13

I do freelance work for two different companies, and next year will be my first time filing my taxes with a 1099. Is there a certain percentage of each check that I should be putting aside? What is the best way to keep track of how much I will owe in taxes?

wavy58
Post 12

There are a few things other than unemployment that I got out of paying as a 1099 contractor. At my old job, my employer would always deduct a certain percentage of my check for something called “cafeteria.” This was a little mysterious, and I don't think anyone in the office actually knew exactly what it was.

Also, I had a 401(k) plan at my old job, and I don't have that money deducted from my check anymore. My husband put me on his insurance plan once I quit and became an independent contractor, so I don't have to spend a fortune on my own insurance.

laclark
Post 11

I have a small business. My daughter works for me about 10 hours a week. I pay her about $100 a week. Do I need to do a 1099?

anon198849
Post 10

I'm a first-time 1099 contractor on a three to four month contract in GA. What are the filing requirements for the state? Do they follow the same schedule as the Feds?

anon152959
Post 9

I just finished my taxes and I am showing a $800 for LLC Taxes LLC Tax Voucher Form 3522 and Form 568 shows $800.

anon128120
Post 8

Who is liable if the person receiving a 1099 does not pay their taxes? Does it fall back on the employer?

anon81174
Post 7

I work for a small flooring company and jobs have been a little slim. The owner is not really all that good at running it, and there seems to be too much personal overhead. Anyway, he wants us, the three employees, to get our own licence so he can pay us under 1099 and him not have to pay anything. What do we do?

anon69780
Post 6

what do you do when you were not a private contractor and you should be getting a w2 instead of a 1099 but the employer is being a jerk? Does anyone know?

anon67812
Post 5

Taxes are a major pain in the butt. does not the American government promote capitalism? Or are they trying in every way possible to limit the way you run your own stinking business?

With so many damn tax liabilities and forms to fill out, who the hell can start a company without all the crazy fees? Taxation of the people as in individual is to be expected, but taxing a business only deters economic growth!

anon63771
Post 4

is there a max amount of money you can claim on your 1099?

anon63742
Post 3
anon63455
Post 2

What is the answer? How much money before you issue a 1099?

anon62535
Post 1

what is the amount one can earn before a 1099 is required?

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