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What does it mean to be a 1099?
Independence is a beautiful thing. Here's what to know about being a 1099 employee.
Setting your own schedule and choosing only the projects you want take on may sound like a dream. And if it’s done right, it can be.
There’s a lot of ambiguity when you’re just starting out though — and 1099s can be at the center of that mystery. We’ll go over what a 1099 employee is, how it impacts how you work and what you should know about the often dreaded tax filings that come with it.
What is a 1099 employee?
To call somebody a “1099 employee” is misleading: To the person or company you’re working for under a 1099, you’re not an employee. Instead, you’re considered an independent contractor. Your income throughout the year is reported to the IRS with Form 1099-MISC.
Independent contractors are different from employees in that you are providing your services to the client, but the way you’re providing them is completely up to you. You’ll typically sign an agreement or contract that includes your working terms, but you may not have the same legal rights as an employee — including minimum and overtime wages.
Common types of independent contractors include:
- Airbnb hosts
- Freelance workers
- Real estate agents
- Self-employed workers
- Uber or Lyft drivers
Who is usually classified as a 1099?
Federal and state governments use different rules to determine whether someone should be classified as a 1099 employee.
The IRS uses these three basic categories to determine if an employee is an independent contractor:
- Behavioral control. The right of the employer to direct or control how you do the work could make it less appropriate for them to classify you as an independent contractor. Your title or merely allowing you to choose your own hours isn’t enough to free an employer from correct classification.
- Financial control. If you’re paid on your own terms — for example, after invoicing the employer — investing in your own equipment and paying your own taxes, you’re more likely to be classified as 1099.
- Relationships. If the business you’re working for hires you on for an indefinite period without a contract, provides benefits and protection and considers your work a key aspect of the business, you’re typically classified as a W-2 employee.
Every state has its own way of classifying independent contractors. Many use the ABC test to determine if an employee is an independent contractor:
- A: The worker is free from control and direction of the hiring entity.
- B: The worker performs work outside the employer’s scope of business
- C: The worker is customarily engaged in a similar trade, occupation or business similar to the hiring entity’s.
Do I have to pay taxes as a 1099 employee?
Yes, you are responsible for paying your own taxes. Your client will not withhold federal or state taxes, like they will for W-2 employees.
If your pay is $600 or more, you should receive Form 1099-MISC to report your income to the IRS from your client. Outside of the 1099-MISC, you may need to file your estimated taxes quarterly if you will pay more than $1,000 in taxes for the fiscal year.
All 1099 employees pay a 15.3% self-employment tax. There are two parts to this tax: 12.4% goes to Social Security and 2.9% goes to Medicare. It’s your responsibility to set aside money to cover these costs as clients aren’t required to withhold these taxes from your paycheck.
Take advantage of the worksheets and resources for filing available on the IRS’s website. If you’re unsure whether you owe taxes or should file a 1099-MISC, it’s probably a good idea to speak with a tax professional.
Ready to file your taxes?
How to pay your taxes online
Throughout the year, it may be a good idea to either do your accounting yourself or hire a professional so you can keep your books organized before filing taxes.
At tax time, you will have a record of your income and any allowable deductible expenditures to refer to.
The benefits and drawbacks of being a 1099 employee
- You set your own schedule. Work whenever you see fit, so long as you meet your deadlines and obligations.
- Control the projects you take. Choose what you want to work on. If you aren’t happy with a client, you aren’t obligated to continue working with them.
- Work from anywhere. As an independent contractor, you can work wherever you can render your services — at home, at a friend’s house, from the cafe down the road or halfway around the world.
- More tax obligations. With a 1099-MISC, you may have to deal with additional tax payments throughout the year or lump-sum prepayments on top of your usual filing.
- No benefits or protections. Health care and retirement aren’t built in to your services, like they are with more traditional employers. With mandatory health insurance regulations in place, you’ll need to cover your bases to avoid paying the individual mandate penalty.
As an independent 1099 worker, you can enjoy the advantages of setting your own price, working around your own schedule and controlling how you meet your obligations to your clients. But you’ll typically lose out on employee benefits like compensated time off, overtime and unemployment benefits, not to mention the responsibility of filing your own taxes throughout or at the end of the year.
Frequently asked questions about 1099 workers
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