Critical Tax Filing Secrets For 1099 Independent Contractors
In the last decade, technology has made huge advances in allowing individuals to contract their time out to companies. Uber, Lyft, UpWork and many more have created an entire economy based on “gigs” or “side hustles” and, as a result, the number of companies using independent contractors, or 1099 employees, has exploded.
It’s now routinely possible for a small business in Florida to have contract employees all over the country who will only receive compensation if they perform certain duties. Until that time, they will sell their skills to other businesses when needed. From a tax standpoint, once these contractors reach $600 in income annually, they’ll need to be provided with a Form 1099-MISC. Commonly referred to simply as a “1099”, this acts as the statement of payments made to the contractor for tax purposes.
There’s one challenge in the 1099 issuing process, though – many of the contractors complain they aren’t sent their 1099’s in a timely fashion. While it may seem that many issuing companies “forget” or are late in sending out 1099s when W2s are usually sent out before February 1st, it is still the responsibility of the issuer to send all contractors a copy by January 31st – the same rules that govern W2s.
Who is considered a 1099?
It is important to understand that, legally, there is no such thing as a “1099 employee.” Often a company may choose to designate certain service providers to be independent contractors instead of employees, but this is not always up to the parties to decide. In fact, the IRS, the Department of Labor, and many different state agencies provide the actual “test” to decide if an individual is an employee or a subcontractor. While the legal ramifications for improper classification of employees can be severe, what is important is to understand who qualifies to be a subcontractor – essentially, a subcontractor will be defined as an independent entity who exerts direct control on their scheduling and their finances, and their relationship to the company in question has been directly defined as that of a contract employee.
What Documents Will You Need to File Taxes as a 1099 Independent Contractor?
The nature of 1099 Independent Contractors for taxation is fairly straightforward. The “employing” company will need to have a W9 form on file for the contractor and, if monies paid to the contractor exceed $600 in a fiscal year, will issue a Form 1099 to that independent contractor. By nature, though, this means that most contractors will have multiple 1099s issued to them annually and that is where the trouble usually starts.
Many companies, especially smaller ones, simply can’t keep track of where the money went and thus, they fail to send out 1099s in the timely fashion that the law requires of them. Thus, the independent contractor often ends up having to work with his or her bookkeeper and tax preparer to research and document where certain income came from and how it was dispersed. The key, as always, is organization – bookkeepers can easily create a spreadsheet of where income is coming from and that can be compared annually against issued 1099s or, if need be, allow the contractor to faithfully report income on tax returns. We know of one instance where one company in Tampa neglected to issue a 1099 for one sales consultant totaling over $100,000. Had the consultant not reported the income, she would still have been liable after the fact – plus any interest and penalties the IRS choose to enforce.
What Can a 1099 Write Off?
The good news about being considered a contractor is that you have the ability, if you have taken the time to incorporate your business properly, to use many of the same tax write offs that any company would use. Our top “1099” write offs are:
- Car expenses and mileage (including the standard mileage rate)
- Home office expenses
- Health insurance premiums (report this on your 1040 form)
- Continuing education (Check IRS Publication 970)
- Cell phone
- Fees, Dues, Subscriptions
Every Job is a Little Different
As you can imagine, there are scores of deductions that can be taken as a 1099. The key is to work with your tax professional and your bookkeeper to make sure that, based on your job, you and your team are keeping track of the specific deductions that your industry is allowed. The IRS Schedule C instructions also provide a great resource for better understanding how to claim those deductions when doing your taxes. The secret, as with anything tax related, is to be detail-oriented in recording any expenses. Doing so can save you a lot of money in the long run!
By: Chris Groote
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