If your employer recently switched you over from a W-2 employee to a 1099-Contractor, there are some important matters you should be concerned about.
Okay, first let’s talk about what your rights are. As a 1099 Contractor, this now means that “you” are responsible for paying your own taxes including federal, state, local (if applicable), social security and medicare because your employer will no longer be withholding these taxes from your pay check. You may want to even consider withholding your own taxes from each payment you receive. You can get yourself set up with EFTPS which is affiliated with the IRS and enables you to pay your taxes electronically from your bank account. There is no fee to set this up nor is there a fee to make your payments. If you don’t want to pay your taxes each pay, try at least making quarterly tax payments. Without paying anything, you may find a hefty tax bill when it’s time to file your income tax return.
You should be aware that going forward, your employer should be issuing you a 1099-MISC instead of a W-2 if you earn $600 or more in a calendar year. You should receive your 1099-MISC around the same time you would have normally received your W-2. Although you may be expecting to receive form 1099-MISC, I strongly encourage you to track and record your income received in your own recordkeeping system. This will help to ensure your employer does not make any mistakes when calculating the total paid to you because they also forward this information to the IRS and the IRS will be expecting you to report matching income.
There is good news! As a 1099 Independent Contractor, you are entitled to business deductions because the IRS will now recognize you as a Sole Proprietor (a business owner) and you are now entitled to deduct many of your everyday expenses. (You can find many business tax deductions and a wealth of information in my ebook “The Home Business & Small Business Tax Toolkit” found at http://www.smallbusinesstartupconsultant.com.)
What many taxpayers don’t realize is that there are pros and cons to this arrangement but one of the biggest pros is the entitlement to business tax deductions, something you were not entitled to while working under a W-2. I will post a part 2 to this question in next week’s “Your Tax Questions Answered" found on my facebook page http://www.facebook.com/hardgeconnections