THE 1099 AND THE INDEPENDENT CONTRACTOR

From time to time I am asked what the difference is between being a full time employee and an independent contractor and what is the affect in terms of paying my taxes? The good folks at Westwood Tax and Consulting have contributed a special positing to shed some light on this subject.

THE 1099 AND THE INDEPENDENT CONTRACTOR:

WHAT IS IT?
The 1099-MISC is an IRS tax form given to those working as independent contractors. For tax purposes, an independent contractor is one who controls how the job is done, sets his or her own hours and supplies his own tools. These tasks are performed outside the entity's management and control.

HOW DOES IT AFFECT YOUR TAXES?
As an independent contractor, you are completely responsible for all taxes paid. There is generally no withholding for Federal, State, City, Social Security and Medicare. Depending on your income level, you are required to make quarterly estimated payments of Federal, State and City tax or else be faced with an underpayment penalty. The IRS requires that you figure the total amount of estimated tax you'll owe in April, divide it by four and send in equal payments on June 15th, September 15th January 15th and April 15th.

EXAMPLE: Joseph Macintosh is a computer consultant working for Apple on a freelance basis. After speaking with the folks at Westwood Tax & Consulting, Joseph was informed that his estimated tax liability will be $12,000 to the IRS and $8000 to NYS. They prepared (4) form 1040-ES forms and (4) IT-2105 MN for him and instructed him to pay $3000 a quarter to the IRS and $2,000 a quarter to NYS.
Additionally, freelancers do not pay payroll taxes through withholding. When you work as an employee, you pay half of social security and Medicare and your employer covers the remaining half. As an independent contractor, you are responsible for the full 15.3 percent tax (known as “self employment tax”). This is levied on your net freelance income, which is your gross income less any expenses. However, the IRS does allow you to deduct half of the self employment tax you’ve paid, which lowers your adjusted gross income.

THE PLUS SIDE: There is a positive aspect to being an independent contractor, though. You can deduct various expenses to reduce your income. As a general rule, the IRS allows you to deduct any expense that is “ordinary or necessary” for the business that you are in. Our friend Joseph Macintosh would be able to write off the cost of his laptop computer but would probably face the wrath of an IRS agent if he decided to write off his brand new Samsung television purchased just recently on Black Friday. As wonderful as a large screen TV is, it would not qualify as an ordinary or necessary business expense in Joseph’s line of work. Some examples of legitimate business expenses for a computer consultant would be travel, an internet connection, telephone and of course, a computer. Meals and entertainment expenses used to entertain a customer or client are potential deductions if you have adequate records to substantiate the expense.

BEWARE: To avoid confusion come tax time, be sure to confirm with your “employer” about whether they consider you a W-2 employee or an independent contractor that will be receiving a 1099 at the end of the year.

FOR MORE INFORMATION: Consult the IRS website at: www.irs.gov or feel free to contact us at www.westwoodtax.com.