What is a 1099 Independent Contractor?
A person who contracts to perform services for others without having the legal status of an employee is an independent contractor (IC). For example, you will likely provide the client with a consulting agreement if you are a consultant. Most individuals who qualify as independent contractors have their own trade, business, or profession. These individuals are self-employed.
Concerning tax forms, a 1099-MISC is typically received by independent contractors; statutory employees generally receive a W-2 form instead.
There are times that an employee will fall under the category of a statutory employee, which is, for lack of a better term, a status between an employee and an independent contractor. Statutory employees receive both a W2 and a 1099-MISC.
Statutory Employee
- Suppose a worker is classified as an independent contractor under the Common Law Rules. In that case, such workers may be treated as employees by statute for specific employment tax purposes if they fall within any of the following four categories.
- A full-time insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, for one life insurance company.
- A driver who distributes beverages (other than milk), meat, vegetable, fruit, or bakery products, or a driver that picks up and delivers laundry or dry cleaning. That is if, the driver is your agent or is paid on commission.
- An individual who works at home on materials or goods you supply must be returned to you or to a person you name if you also furnish for the work to be done.
- A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity. Note that these conditions do not constitute a definitive rule. The determination of whether such a worker is a statutory employee depends on specific criteria outlined by the IRS.
Here is an article for more information regarding Statutory employees.
Note that a 1099 worker is generally a nonemployee of a company. Following is a brief overview of what being an independent contractor involves:
- You pay your own taxes
- You are self-employed
- You negotiate and set your salary/pay rate
- You set your own schedule
- You provide your own work equipment/tools
- You can refuse work
Concerning negotiating setting salary/pay rates, independent contractors do have some flexibility in this regard. But the actual negotiation of rates may depend on various factors such as market demand and client agreements.
Also, while independent contractors can refuse work, the ability to do so may depend on the specific terms of the contract or agreement with the client.
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Classification Rules for 1099 Independent Contractors
An independent contractor is a self-employed worker. Despite the number of google searches referencing the term independent contractor employee, in the eyes of the IRS and state taxing agencies, an independent contractor is not an employee in the traditional sense. Keep in mind that a statutory employee receives both a Form W2 and a Form 1099-MISC. However, this person is considered an employee and not an independent contractor.
The IRS has defined the difference between an independent contractor and an employee. The IRS uses three categories under the Common Law Rules to determine whether a worker should be classified as an independent contractor or an employee.
Behavioral Control
Does the company control, or have the right to control, what the worker does and how they do their job?
Financial Control
Are the business aspects of the worker’s job controlled by the payer? (e.g., how the worker is paid, whether expenses are reimbursed, or who provides the equipment, tools, and supplies.
Relationship
Are there written contracts or employee-type benefits (i.e., insurance, vacation pay, pension plan, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?
Businesses must weigh the Common Law Rules factors when determining whether workers are employees or independent contractors. While some elements may indicate that the worker is an employee, other factors may indicate that the worker is an independent contractor. Remember that factors relevant in one situation may not be applicable in another situation.
Look at the entire relationship and consider the extent of the right to direct and control the worker. Then, when making the determination, document each of the factors used to make the determination.
After considering the Common Law Rules, either an employer or employee can complete IRS Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). Based on the information on the form, the IRS will decide if the worker should be classified as an employee or independent contractor.
1099 Independent Contractor vs. Employee
The three factors (Behavioral Control, Financial Control, and Relationship of the parties) under the Common Law Rules are used when determining the classification of an independent contractor and an employee.
Behavioral Control
A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that is not exercised. Behavioral control categories are:
- Type of instruction given.
- Degree of instruction.
- Evaluation systems to measure the details of how the work is done.
- Services available to the market.
- Training a worker on how to do the job.
Financial Control
Does the business have a right to direct or control the financial and business aspects of the worker’s job? Things to consider:
- Significant investment in the equipment the worker uses.
- Unreimbursed expenses.
- Opportunity for profit or loss is often an indicator of an independent contractor.
- Services available to the market.
- Method of payment.
Relationship
The type of relationship depends on how the worker and business perceive their interaction. This includes:
- Written contracts which describe the relationship between the parties.
- Benefits
- The permanency of the relationship is important. The expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- Services provided which are a key activity of the business.
Examples of an Independent Contractor
It is important to remember that an independent contractor operates in a professional or business context. An independent contractor occupation can be any type where the person performing a job has control over how work is completed to achieve the task they were hired for. An independent contractor can be any of the following:
- Consultant
- Freelancer
- Gig worker (Uber, Lyft, DoorDash driver, etc.)
- Tradespeople
- Artists
- Self-employed individuals in general
The list is not all-inclusive. For example, professionals that independently hire their services out are independent contractors.
Tax Requirements for 1099 Independent Contractors
As a self-employed individual, you will need to pay self-employment taxes (equivalent to Social Security and Medicare taxes) that an employee pays. The current self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). In addition to self-employment taxes, you will also need to pay federal and state income taxes.
The following states do not impose a tax on personal income.
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
- New Hampshire does not tax earned income
Independent contractors are required to make estimated tax payments. Estimated tax payments are tax payments for (self-employment, state, and federal income taxes). Estimated tax payments are paid quarterly (4 times a year).
If you are mailing the estimated tax payments to the IRS, you will use IRS Form 1040-ES. There are online options available to pay estimated and income taxes as well.
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Finally, it is always recommended to consult with a legal professional or tax advisor for accurate and up-to-date information regarding independent contractor status and tax obligations.
