Working on a 1099 basis actually means that you are working as a true Independent Contractor under the IRS rules. In their eyes, you are self-employed such as a sole proprietor or a corporation. Therefore, you are responsible for maintaining all business expenses and income and for making quarterly federal and state income tax payments. At the end of the year, you must report the income and deduct expenses that are directly related to the business on a Schedule C. The net income from your business will then flow through to your 1040 (line 12) and you will pay tax on the net income at your personal marginal tax rate.
There are a number of additional IRS criteria that you must meet in order to qualify as a 1099 employee. Note that the IRS can review your situation after the fact and decide you were really an employee resulting in significant penalties and back payroll taxes.
Here are some additional helpful links:
- Receive entire rate without tax deductions allowing you to have more money up front and pay later.
- Additional money up front allows you to invest or spend when you need it.
- Losses might be used to offset other income (limits apply).
- Possible eligibility to take additional Home Office Deduction.
- Easy to set up.
- Increasingly strict regulations and stiffer penalties.
- All profit is subject to self-employment tax in addition to income tax.
- You must make quarterly estimated tax payments.
- Unlimited liability for the owner.
- More administration and bookkeeping than the W-2 option.
If you have any additional questions please feel free to contact any one of our IT recruiters at AVID Technical Resources.