Tax Planning

What is a 1099 Employee? The Definitive Guide to 1099 Status

In the land between an employee and an incorporated business lives the independent contractor. An independent contractor acts mu9ch like a business owner but don’t meet all the “formalities” that come with being a business. Sometimes called a 1099 employee, here’s a closer look at 1099s, independent contracting, and what it means for tax time.

What is a 1099 employee?

The term ‘1099-employee’ refers to an independent contractor who receives 1099 forms for the services they provide to hiring parties which exceed $600 in one tax year.

What is the difference between an employee and an independent contractor?

In most cases, the IRS classifies an individual who provides services to a hiring party as an independent contractor or an employee. Independent contractors are self-employed while employees are employed by a company.

Employers must withhold income taxes, pay Medicare taxes, and pay Social Security for employees. However, they don’t need to do any of the above when they hire independent contractors.

Instead, when an entity hires an independent contractor, they only have to pay for the services. If the amount is over $600 in one year, the hiring party must file a 1099 IRS form to report the amount they paid. The independent contractor is responsible for their own taxes.

what is a 1099 form

In many cases, it is easier for an employer to hire an independent contractor because it reduces liability and administration costs. However, according to the IRS, the business relationship between the hiring party and service provider determines how payments should be treated.

How can you determine whether a service provider is an employee or an independent contractor?

Are you unsure whether your service provider should be considered an employee or an independent contractor? Or maybe you are the service provider and aren’t sure which classification applies to you.

The IRS states that you can determine whether an individual is an employee or an independent contractor by looking at their level of independence and the degree of control that the hiring party holds.

For example, you can ask the following questions:

  • Relationship: Is the service provided on an ongoing basis? Is it a key part of a business? Are there written contracts? Does the provider receive employee-type benefits like insurance, vacation pay, etc.?
  • Financial: Does the payer control how much and how the service provider is paid? Do they provide tools and supplies?
  • Behavioral: Does the payer of the services control how the service provider performs the work?

If you answer yes to all of the above, the provider is likely an employee. Contractors work as an independent entity, so they have the right to decide their prices, how they get paid, and how they perform their services. Employees do not have these rights.

Employee vs. contractor, still not sure?

There is some gray area on this as every situation is different. In some ways, a provider may function more like an employee but in others more like an independent contractor. You have to look at the relationship as a whole to consider the extent to which the hiring party has the right to direct and control the interaction.

If you are the hiring party and you misclassify an employee as an independent contractor, you can be held liable for the employment taxes of that individual and penalties.

To avoid that, you can file form SS-8 with the IRS, which is a Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. 

what is ss-8 form

How much does a 1099 employee pay in taxes?

Independent contractors are responsible for paying the self-employment tax as well as a percentage of their taxable income. The amount of tax owed on income will depend on the individual’s tax bracket and filing status.

For the 2018 tax year, the self-employment tax rate was 15.3% on net self-employment earnings. Federal income tax rates ranged from 10% to 37%. So, for example, say you are a single filer who made $35,000 in taxable income as an independent contractor in 2018. You would pay 12% in income tax ($4,200) and 15.3% in self-employment tax ($5,250). The total due to the federal government would be $9,450, leaving a net profit of $25,550. Note, states taxes may also apply.

What is the difference between a 1099 and a w-2?

A 1099 IRS form is used to report the amount of income which is received by a party within a tax year (excluding regular employment income). It details the payer’s and recipient’s information as well as the amount paid.

A W-2 is also an IRS form, but it is used to report the amount of money that an employee earns in a year from an employer. It also shows the amount of federal, state, and other taxes withheld from the employee’s paycheck.

What can you write off as a 1099 employee?

Independent contractors are considered business owners so they can write off expenses from their trade. Common deductions include the following when they are incurred as part of providing business services:

  • Car expenses.
  • Car mileage.
  • Home office expenses.
  • Supplies.
  • Health insurance premiums.
  • Business cell phone.
  • Business travel.
  • Paid parking.
  • Fees.
  • Dues.
  • Subscriptions.
  • Travel
  • Depreciation of assets.
  • Advertising.
  • Repairs and maintenance.
  • Contract labor.
  • Legal and professional services.
  • Employee pension or retirement plans.

It’s beneficial to keep track of your business-related expenses throughout the year so you can use them to reduce your tax liability.

What are the benefits of being a 1099 employee?

As an independent contractor, you are a business owner and can set the terms and conditions of your services. This gives you greater flexibility and freedom. Set your hours, maximize your earning potential, and choose the clients you work with. However, freedom also comes with more responsibility. If you want to grow your business, you will have to provide value that keeps customers coming back.

You will also receive the full payment for your services upfront. You are responsible for withholding your own taxes and paying them on time so will not have any deductions automatically taken out.

Lastly, when it comes to tax time, you can deduct business expenses to lower your tax liability.

Can you be both a 1099 and W-2 employee?

If you have a job and also provide work on the side as an independent contractor, you will receive both a 1099 form and a W-2 to report your earnings. So it is possible to be an employee and a contractor in the same tax year.

Get support from a tax expert

Taxes can be complicated, and mistakes can be costly. If you are earning income as a contractor, your taxes may become a bit more complicated. Having a tax expert on your side can help you ensure everything is correct so you don’t pay more or less than you should. Further, if the IRS does come back with questions, you will have a knowledgeable representative on your side.

Not sure where to turn? Compare our leading tax prep firms here.