Skip to content
All posts

What does it mean to be a 1099 contractor?

Picture of Alexis Augustine - Financial Educator By  Alexis Augustine - Financial Educator  ·  2 minute read

Being a 1099 contractor means that you are considered self-employed by the IRS and that you are not considered an employee of the company you are working for. Instead, you are considered an independent contractor.

As a 1099 contractor, you are responsible for providing your own tools and equipment, determining your own work schedule, and paying your own taxes. The company you work for will not withhold taxes from your pay, and will not provide benefits such as health insurance or paid time off. Instead, you will receive a Form 1099-MISC at the end of the year, which reports the income you received from the company.

A 1099 contractor also has more control over their business, they can choose their own clients, set their own rates, and have more flexibility in their work schedule. They also have the ability to work with multiple clients at the same time and are not limited to working only for one employer. 

As a 1099 contractor, you have the advantage of being considered self-employed by the IRS, which means you have more control over your taxes and can potentially save more money. Here are a few key tax advantages to being a 1099 contractor rather than a W2 employee:

  1. Deductions: As a 1099 contractor, you can claim a wide range of deductions that are not available to W2 employees. These include office expenses, travel costs, and self-employed health insurance. This can significantly reduce your taxable income and lower your overall tax bill.

  2. Self-Employment Tax: W2 employees have Social Security and Medicare taxes withheld from their paychecks. As a 1099 contractor, you are responsible for paying self-employment tax, which is the equivalent of both the employee and employer portion of these taxes. However, the self-employment tax rate is lower than the combined employee/employer tax rate for W2 employees.

  3. Retirement savings: As a 1099 contractor, you have the option to contribute to a solo 401(k) or a SEP-IRA, which can provide significant tax benefits. These plans allow you to contribute a larger percentage of your income than traditional 401(k)s, which can help you save more for retirement.

  4. Flexibility: Being a 1099 contractor allows you to have more control over your schedule and work environment. You can choose when and where you want to work, which can provide more freedom and flexibility.

It's worth noting that being a 1099 contractor also means that you are responsible for paying your own taxes and for keeping track of all your income and expenses. It's also important to remember that some states have different tax laws for 1099 contractors, so it's important to check with your state's revenue department to understand your obligations.

In conclusion, being a 1099 contractor can provide significant tax advantages over being a W2 employee. However, it's important to weigh the pros and cons and make sure that being a 1099 contractor is the right choice for you. Always consult with a tax professional or accountant to ensure you are in compliance with all tax laws and regulations.