If you’ve grown tired of working for an employer or are looking to start your own business, one option is to become an independent contractor. Independent contractors are sometimes called 1099 employees. This is taken from the name of the IRS form a client must send to an independent contractor if the client paid more than $600 for the contractor’s services in a given year. A primary difference between 1099 employees and regular employees is that independent contractors have significantly greater control over their work situation.
As a 1099 worker, you are your own boss, which gives you greater career flexibility. You are not tied to one employer, so you have more freedom to select assignments from multiple employers that meet your wants and needs, and to refuse those that are unsuitable. More emphasis is often placed on the finished product rather than the time it takes to complete a task, so you also enjoy increased scheduling flexibility. This can make a 1099 arrangement beneficial for individuals such as parents with young children or retirees looking to supplement their income.
No Tax Withholding
You will enjoy greater control over your tax situation as a 1099 employee. Independent contractors are not subject to the withholding of federal, state, or local tax by an employer, so nothing is deducted from your paycheck. You are paid the full amount you contract for. This can help you meet your short-term final obligations and result in an improved cash flow situation. The IRS requires you to make quarterly estimated tax payments unless you meet qualifications for certain exceptions, and you can incur penalties if you underpay.
Increased Earnings Potential
Unlike a typical employer-employee relationship, there is no ceiling on your earnings as a 1099 employee. There are no limitations placed on the number of hours you work, and you are free to negotiate your own rates and terms with prospective clients. The fact that employers do not have to shell out for items such as Social Security, Medicare, unemployment insurance and fringe benefits also gives them the freedom to pay an independent contractor more for specialty services than they might be willing to pay an in-house employee for comparable services.
The IRS considers independent contractors to be self-employed business owners, which offers you the opportunity to deduct a number of business expenses on your income tax return. As of 2012, deductible expenses can include health insurance premiums, office supplies, auto and travel expenses, a portion of home rent or mortgage payments, and a portion of utility costs. Therefore, it is essential to keep accurate and thorough records of all expenses you incur in the course of your work-related activities.