1099 contractors are a vastly important part of today’s workforce. From the gig economy to specialized services, they offer something that traditional companies and employees cannot provide. However, there are very specific laws surrounding 1099 contractors that both companies and individuals should understand.
In this post, we have described everything that you want to know about 1099 contracting, including how to become a contractor and other considerations:
What is a 1099 Contractor?
A 1099 contractor, also called an independent contractor , is a term used to describe self-employed people who require a company to issue a Form 1099-MISC. They are an entity contracted with a company as a non-employee, which is different from the treatment of employees.
1099 contractors must remain free from managerial control and direction throughout the course of the project. They must also have complete and total say over when and where they work. Companies that violate these rights can face employment law disputes by aggrieved parties.
Here is an article that defines independent contractors vs. employees.
How to Become a 1099 Contractor
It’s a fairly straightforward process for becoming a 1099 contractor. However, they are much different from traditional types of employment that go beyond the absence of guaranteed employment benefits. Always perform your due diligence when engaging in a new legal endeavor.
Here are three steps that you should take when becoming a 1099 contractor:
Step 1. Choose a Business Name and Structure
Don’t go out and buy business cards and stationery until you’ve decided on a business name. First, make sure that another business isn’t using your name. If your business name differs from the name of your company, you may need to file a tradename or “ doing business as ” form with your state.
You’ll also need to file your business with the state. Common 1099 contractor business structures include:
Once you have a business name and the required certificates, you can obtain a business location and start creating marketing and promotion materials you’ll need, such as a website, business cards, and advertising brochures. You can utilize a business plan to help you devise your strategy or gain capital funding, if necessary.
Step 2. Open a checking account for your business.
Getting a business checking account will make it clear to the IRS that you and your company are distinct entities. Once you have a business checking account, you can deposit funds as an investment and begin paying for all items you’ll need to get your business up and running. You can also use a business checking account to apply for credit and more.
Of course, you can put money into your business bank account to cover startup costs if you have money coming in. It’s best to use a business account rather than a personal account to avoid intertwining payments and income. You never know what issues can arise in the future so try to keep things separate.
Step 3. Create an easy-to-use business record-keeping system.
Gather the information you’ll need to prove your right to take legitimate business deductions. Keeping track of your business income and expenses will help you understand how well your company is performing, and you will be able to deduct those expenses from your income at tax time.
Make a simple budget to see how much money you’ll need to get started. Then, you can tell how your business is doing by reviewing and preparing your business financial statements each month, including a profit and loss statement and a balance sheet. Monitoring your financial performance routinely can result in greater profitability and fewer errors.
Step 4. Create Your Independent Contractor Agreements
An independent contractor agreement is central to managing your relationships with other businesses. Work with contract or employment lawyers to help you draft the proper agreements. They can also assist you in your venture, including setting up a sole proprietorship or LLC and navigate state-specific laws, such as for a California independent contractor .
1099 Contractors vs. Employees
The primary difference between independent contractors vs. employees is control. If the employer dictates all terms and does so consistently over time, the person is most likely an employee.
Employees also receive a regular wage, receive employee benefits, have taxes deducted from their salaries, and the employer dictates their work and schedule. Full-time employees generally receive additional benefits, such as severance pay , workers’ compensation, and anti-discrimination protections. Employees are required to pay payroll taxes on their salaries.
Independent contractors are the polar opposite of employees. They are more likely to be paid for projects, pay their own taxes, and work when and where they want. The IRS considers them self-employed for tax purposes, which means they must pay self-employment tax.
Do 1099 Contractors Pay Taxes?
Yes, 1099 contractors pay taxes. They pay a self-employment tax on earnings of $400 or more. A legal or tax professional can help you learn more about how 1099 contractors pay taxes according to your specific situation.
Examples of Independent Contractors
The ability to retain control over how the work and payment methodologies are critical characteristics of an independent contractor. There are of industries that allow you to work as an independent contractor.
Here are a few examples of independent contractors below:
This example involves a 1099 independent contractor writer who offers services to companies online:
- Jennifer is a web content writer
- She helps other businesses write copy for their website and social media
- She also offers SEO services long-term
- Jennifer operates as a sole-proprietor
- She doesn’t have a separate legal entity set up in her name
- Instead, she pays all taxes on earnings and works with clients on a contracts
- Jennifer doesn’t get unique tax advantages
- Jennifer is still operating her business properly as a 1099 independent contractor
Lawn Care Companies
This example involves a 1099 independent contractor lawn care company that offers services to companies locally:
- Lawn & Order is a lawn care company
- The company was formed by two brothers who share a passion for grass and trees
- They both want to maintain independent contractor status
- However, they also want to become bonafide partners
- The brothers decide to former a partnership and offer their services as independent contractors to local businesses
- Lawn & Order uses service agreements to manage client relationships
- The brothers equally share profits and debts with each other
This example involves a 1099 independent contractor logo designer who offers services to companies online:
- Chester is a logo designer
- He used to work for a company before going out on his own
- Chester forms an LLC to avoid personal tax liabilities
- Chester pays taxes according to the LLC provisions from the IRS
Regardless of how you structure your company, you may qualify as an independent contractor. If you work as a sole proprietor, form a limited liability company, or form a corporation, you may be considered an independent contractor. You can become an independent contractor as long as you are not under an employee classification.
If you have questions about being a 1099 contractor, you should always speak with contract lawyers. From the business formation to the appropriate agreements, they can guide you through every legal endeavor. Your legal team will also ensure that your company stays healthy over the long term.
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