April 15th is just around the corner and amidst the flurry of receipts and tax filling activities, SoloPoint typically receives a fair number of questions regarding a common topic – “What are the tax implications if I worked as a 1099 Independent Contractor during the year?”
As an employer of over 120 engineering contractors and consultants, SoloPoint is very familiar with the rules – and common confusions – of the 1099 tax status. We start by defining what a 1099 is and review the implications.
Tax definition:
According to the Internal Revenue Service (IRS) code, a 1099 contractor is defined as a business owner or a self-employed consultant who provides services to other businesses. The “1099” refers to the IRS form that an independent contractor receives stating his/her income from a given business during a given tax year.
To qualify to operate as a 1099:
The IRS developed factors that measure a 1099 contractor’s degree of independence. These factors are found within a three-area test. To see if you qualify as a 1099 contractor, consider the following items:
1) Behavioral: Who manages or directs your day to day activities? If your customer or client directs your workflow daily or regularly, this is a basis for disqualification. You should own all computers and other equipment required to perform the work. Using clients’ computers and equipment is a red flag.
2) Financial: You should be paid per project (not hourly, weekly, or monthly) and you should submit proposals and invoices to your clients.
3) Type of Relationship: The relationship should be stated as “business to business” or “Corp to Corp”, not employer/employee. 1099 contractors are not employees, therefore not eligible to receive company benefits such as paid vacation, sick days, medical insurance, or overtime.
Tax Ramifications:
If you operated as a 1099 contractor, you are both the employer and employee. That means you are responsible to pay not only the employee’s portion of Social Security and Medicare tax, but also the employer’s portion as well which is currently 6.2% for social security and 1.45% for Medicare (a total of 15.3% in employment taxes).
Many people mistakenly assume that they can collect unemployment benefits after their consulting project is over. If you have not contributed any funds to the state or federal unemployment accounts for the previous two quarters (as an employee or employer) you will not be eligible to collect unemployment benefits. Operating as a 1099 independent contractor, you do not have the mechanism set-up to make unemployment contributions.
Tax preparations and expense deductions are factors as well. As a 1099 contractor, on a regular basis, you should be creating invoices, tracking expenses and filing quarterly taxes instead of once a year as a W-2 employee.
All the information above can be found on the IRS website: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee
SoloPoint works with a vast number of companies and contract engineers every year. One of the most common problems we see is misclassification and noncompliance of employment status – on the part of the individual as well as the employer. This can potentially result in serious penalties and back taxes. The way SoloPoint protects its clients is to ensure that every engineering candidate we present is properly vetted and classified. For the candidates who do not qualify to operate as a 1099, we classify them as a regular W-2 employees and provide the worker’s compensation, liability, unemployment insurance as well as handle the proper employment tax with holdings.
To understand more about this topic, please visit us at www.solopointsolutions.com.