A 1099 contractor is a legal and tax-related term used in the United States to refer to the type of worker who contracts his services out to a business or businesses. These contractors exist in multiple fields — from hospital planners, to marketing consultants, to building contractors, to freelance writers. The "1099" refers to the Internal Revenue Service (IRS) form that an independent contractor receives stating his income from a given business during a given tax year. A 1099 contractor is not an employee of the business or businesses with which he works; instead he is an independent contractor, or consultant, who is considered to be self-employed. Like most self-employed workers, they do not typically receive employee benefits, such as health insurance or retirement benefits, but they may have more flexible work schedules and locations.
Compensation
The 1099 contractor is usually not protected by minimum wage laws; in fact, some independent contractors work below minimum wage. His payment is typically assessed by the completion of a job, not by the hours worked — when a job takes more time than expected, earnings may fall below minimum wage. On the other hand, a skilled independent contractor can work for far above minimum wage, particularly those who have expertise in a specific field and work on a consultant basis.
When balancing the tradeoffs between working as a 1099 contractor or an employee, perhaps the largest consideration should be the way the worker is compensated for his services. In a typical scenario, independent contractors are not paid until the service is fully completed, and they are not offered any type of employment benefits. As a result, the payment scheme for most such workers requires more independence and responsibility, as things such as medical and dental benefits, savings to cover future sick and vacation days, as well as tax obligations fall solely within the purview of the worker.
Tax Differences
1099 contractors who make more than a certain amount per year are issued 1099 forms from the business or businesses that paid them. Regular employees must pay income and Social Security taxes on their income, and independent contractors must do the same; the difference is that employers generally withhold taxes on the employee's behalf, while 1099 contractors are responsible for their own payments. Additionally, employers generally cover half of the total Social Security and Medicare taxes — a 15% tax of net income in 2011 — meaning that the employer covers 7.5% on behalf of the employee; independent contractors are typically responsible for the entire amount.
Since an independent contractor is considered self-employed, he is essentially the employer and employee; therefore, he is responsible for withholding his own taxes and paying the total amount of the Social Security and Medicare taxes. Regular employees usually have estimated tax liabilities withheld from each paycheck, but this is not done for a 1099 contractor. Most self-employed individuals are required to make quarterly installments against their projected tax responsibilities for the year, however.
There are some deductions that can be made to reduce tax obligations, these include work-related expenses, such as home office costs and vehicle costs, if the office and car are used for a work-related purpose. A computer that is purchased in order to work as an independent contractor, for example, may be deductible from the person's net income. Contractors should save all pertinent business receipts for the year in order to claim these as business expenses.
Benefits and Disadvantages
The independent contractor generally has scheduling advantages over the employee — often, he is not restricted to the typical nine-to-five workday and Monday-through-Friday work week like the average employee. Deadlines, of course, may confine the independent contractor's work schedule. On the other hand, he generally doesn't get the benefits that employees often do, such as time off with pay, whether it be due to illness or leisure.
Further, there are different legal implications for an independent contractor than an employee, and these implications can vary greatly based on the specific contract terms between the contractor and the client or business. In many cases, the 1099 contractor can be discharged at will, with or without cause. Additionally, he is usually responsible for his own health insurance and retirement benefits, as the companies worked for are under no obligation to provide benefits.
