The increase in contract hiring has been a very sound strategic move for many businesses. Contract employment is on the rise but so is employee misclassification and penalties. In light of the increase in 1099 hiring, you need to take special care in worker classification to avoid fines and penalties from the IRS.
Under the IRS, an independent contractor is considered a 1099 if the employee is paid by the job or by the hour and furnishes the tools and materials necessary to do the work. If you pay your own business and travel expenses in addition to working for more than one company at a time, then you might be qualified to file for a 1099. It may not be necessary to withhold taxes including Social Security, but you have to make sure you got all taxes accurately filed on your end.
Because independent contractors are viewed as self-employed, you get paid in full and without deductions but are responsible in filing your own taxes. Don’t party yet. There are pros and cons of having a 1099 income.
1 You are able to set your own price. Make it high. Make it low. You can set your own price.
2 You set your own work hours. You are free to choose when and when not to work.
3 Have 1099 tax set up advantages. Can deduct business related expenses on taxes.
4 Can typically get things done on their own terms and pace.
5 Do not actually adhere to strict company policies as long as the work is being completed on time.
6 Employers don’t pay 1099 independent contractors paid time off and insurance.
7 Employers spend less time and training for independent contractors because they are already highly skilled workers.
8 Independent contractors can earn more and work less.
9 Contractors work with little supervision whenever they want because they exercise more freedom.
10 Can negotiate pay rates and payment schedule.
11 You are your own boss as an independent 1099 contractor. You can choose how and where to work.
12 Flexible earnings can mean just going out to find more jobs if you want to earn more.
13 You have the ability to earn more or earn less than regular employees largely depending on your motivation to work or goals in life.
14 You may pay lower income taxes and hold on to your money longer before it gets turned over to the IRS.
15 You can decide how much estimated tax to pay but if you got the computation wrong, you are also going to pay a penalty.
16 Can establish tax advantaged retirement plans such as SEP-IRAs and 401(k) plans until you retire.
17 Do not enjoy benefits like sick days, vacation hours, health and dental insurance, worker’s comp, retirement, pension and unemployment benefits.
18 Not covered by an employer’s liability insurance.
19 Not eligible for overtime pay.
20 If you have not made quarterly tax estimates, you will be in trouble when you file taxes every April. At filing time, the reality hits hard especially if you forgot to set aside a little cash from each contract job accepted.
21 No job security. You or the employer can terminate the contract agreement without further responsibility to each other and even on a short notice.
22 In case of abrupt contract termination, you will have little time to find a replacement arrangement.
23 In the agreement, the employer has an upper hand on the terms and conditions. If you don’t sign, you won’t probably win the contract.
24 Little protection from law or less legal recourse in the event of a dispute. Any written agreement between you and the employer will most likely limit your ability to seek legal remedies.
25 May not build a relationship with the employers like inhouse employees because they work off-site.
26 There is no guarantee of income. Does not get a regular paycheck. If there is no work, you have no money coming in to your bank account.
27 For employers, firing an employee for cause is generally a pretty painless action but terminating a contract with an independent contractor early could mean a day in court.
28 May get penalized by the IRS if business expenses are wrong.
29 May get penalized if estimated tax paid is underpaid.
30 Run into the risk of not being paid. Customers may not pay on time or at all. You personally bear the loss of not being paid.
31 May lose what you own if the business fails and if you are deep into loans because you are personally liable for the debts of the business.
Many independent contractors love their freedom and are happy working for it. However, your clients may not direct your work like their employees because you are expected to perform your work in a timely manner as specified in the contract.
Independent contractors have the option not to engage in an expensive, long term commitment. Living the life of an independent contractor may mean high income variability and complex tax filing. Some are beginners that are being pushed into a complex tax environment with little knowledge and experience about it.
Being a 1099 IC is a different way of working. It is one employment method where you can definitely cut costs and can be benefiting you. If you work on a contract basis, you may be spending a lot of your time at home doing the tasks. If you get out, you can always claim the gas as an expense.
You have the option to decide how many companies you would work in a year for a limited period of time or longer period of time. This is very awesome but make sure you have enough work to pay basic necessities and bills.
The key is to start with a side gig while you still work on your day job to make sure you have something to eat just in case it would fail for some reason. Set up a goal and plan how you will earn or achieve your goal.
The scary thing here is that you only get paid for the work that you do and it you do not have any, you really don’t have anything to eat!