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Independent Contractors LifeBack Tax
An independent contractor is paid to work for a business, but as a separate firm instead of as an employee. This includes doctors, lawyers, accountants, consultants, mechanics, freelance writers, and other professionals who operate independently and publicly market their services to clients. They are not covered by wage and labor laws, and typically do not receive employee benefits such as pensions, insurance, or paid vacation. They typically invest in their own tools and supplies, and are not entitled to reimbursement for business expenses. In exchange, an independent contractor enjoys far greater autonomy than an employee, and is free to determine their own working hours and location.
Independent contractors are usually hired to work on specific projects and often receive a flat fee for each job, while others are paid hourly for their services. They are sometimes called "1099 contractors" because their pay is reported on a Form 1099 in place of the W-2 form that an employee receives. A business must file a Form 1099 if they paid a contractor more than $600 for their services that year. Independent contractors receive separate Form 1099s from different clients, just as an employee that had multiple employers would receive separate W-2s from each employer.
Unlike employees, independent contractors are self-employed and businesses in their own right. No taxes are withheld from their pay, so independent contractors are responsible for paying their own income taxes. They must also pay "self-employment taxes" on Social Security and Medicare, which are similar to the FICA payroll taxes that an employer withholds from an employee's pay. Since the contractor is their own employer, the employer share of Social Security and Medicare taxes may be deducted as a business expense.
The IRS imposes harsh penalties on employers who fail to withhold and pay employment taxes due to incorrectly classifying workers as independent contractors instead of employees. A worker is only recognized as an independent contractor if they have a certain degree of independence over their work. If the client business can control what work a worker does and how they do it, such as assigning specific tasks or mandating certain working hours, then the worker is a regular employee for tax purposes. The law may also consider factors such as whether the worker is financially dependent on the hirer, if the arrangement resembles a long-term employee-employer relationship, or if the work is a key aspect of the business.
As a sole proprietor, an independent contractor reports their business income on their annual tax return and may claim deductible business expenses. Thorough bookkeeping is crucial for independent contractors, especially when it comes to income and self-employment taxes. Since they do not have tax withholding, an independent contractor is responsible for recording of their income and estimating their tax liability, regardless of whether they received a Form 1099 from each client. They must make tax payments each quarter if they expect to owe at least $1,000 in taxes by the end of the year.
If you are facing tax issues as an independent contractor or a business that hired an independent contractor, please contact us right away. The IRS is quick to penalize businesses for failing to remit taxes for any reason. Penalties and interest can rack up quickly on back taxes, and may put your firm at risk of a tax lien or even an administrative levy. We at LifeBack Tax Relief specialize in finding quick tax solutions for taxpayers in trouble, and will negotiate with the IRS to resolve your issues.
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