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A Few Tax Issues for 1099 for the Independent Contractor and Companies that Employ Independent Contractors
April 18, 2017
Freelancers and independent contractors will receive a Form 1099 instead of a W-2 form at the end of the year from the company that employs them to perform the contract work. There are several issues that both the employer of an independent contractor and the independent contractor should be aware of that can cause tax issues with the IRS..
Many companies hire independent contractors to perform a particular project for long or short contracts for the company. One of the differences between employees and independent contractors is the way they receive compensate for the jobs they perform. An employee's wages are reported to the IRS and state tax authorities on form W-2 and an independent contractor’s income is reported on form 1099.
An employee will receive a paycheck with deductions to cover income taxes, social security, Medicare and other required payments. The employer pays a portion of the required payments on behalf of the employee, and withholds the rest from the employee’s paycheck.
An independent contractor does not have deductions withheld from their earnings. An independent contractor is responsible for the full amount of the required payments, plus self-employment taxes. This includes local, state, and federal taxes that must be paid.
#1 Issue for the Independent Contractor - Not Setting Aside Enough Money for Taxes
The most common mistake that independent contractors and freelancers make is forgetting to set aside enough money to pay the self-employment taxes. Independent contractors taxes seem higher than taxes for employees because they are paying both the employer and employee portions of the taxes. It is critical that independent contractors set aside money each month to cover the taxes.
#2 Issue for the Independent Contractor - Not Paying Quarterly Payments on Time (or at all…)
Estimated tax payments must be made at least four times a year (quarterly) to the IRS, and include both income tax and self-employment tax (Social Security and Medicare) payments.
Independent contractors must pay their estimated tax payments on time or they will be hit with a penalty for underpaying. Quarterly estimated tax forms – with payment in full of your estimated taxes are due every year on these dates or the next business day after these dates if they fall on a Saturday or Sunday:
#3 Issue for the Independent Contractor - Updating Former Companies of an Address Change
Another issue for independent contractors is moving and not providing the company that hired them the new address. Each 1099 is matched to both the companies EIN and independent contractors social security numbers the IRS can send a tax bill if you fail to report a missing 1099. Even if your 1099 is mailed to an old address, it is reported to the IRS so failing to include it in your tax return increases your risk of audit.
#1 Issue for Companies that Employ Independent Contractors - Risk of Audit
The most common issue that companies have when employing independent contractors and freelancers make is that they have a higher risk of audit than companies that have employees. The government like companies to have as many workers on staff as possible because it is harder for workers to underreport income and increases the tax and insurance money coming into the government.
#2 Issue for Companies that Employ Independent Contractors - Liable for Injuries on the Job
Independent contractors are not covered by workers' compensation unlike employees who are injured on the job are usually covered by workers' compensation insurance. If an independent contractor gets injured on the job, they can sue for the injury and recover damages. An employee receives workers compensation benefits and due to these benefits the employee gives up the right to sue their employer for damages.
#3 Issue for Companies that Employ Independent Contractors - Properly Completing the W-9
Another issue when hiring an independent contractor is having misinformation or missing information on the W9 or no W9 at all. Companies are obligated to file a 1099 for all independent contractors that receive $600 or more. If you did not collect a W-9 before paying your independent contractor or have misinformation for the independent contract, it may prevent you from issuing a 1099. In addition, there are penalties for not providing the 1099 on time to your independent contractor.