Starting a New Job as an Independent Contractor
A comment left on the post "What's Form W-9?" caught my attention in this regard. The question deserves a fuller response, and you might have some advice to add yourself.
The question asked was this:
"Hi, I am a fresh grad with no idea about this income tax thing. I joined a website [...] where people hire you online. My problem is the site is asking me to submit a W9 form and I don’t know what it is for. I have never been employed and I don’t have any ideas what will happen if I pass that form. Will I be doing income tax returns when I submit that form? Will I be he one to compute my income tax? Sorry for being stupid but I really need help."
The reader's question is reasonable, not at all stupid. In fact, with such a wide variety of tax forms, it is often a chore just to figure out what a particular form means and how the information will be used.
Form W-9 is used by a company to request the name, address, and Social Security number for an independent contractor who will be providing services to the company. Another term for an independent contractor would be consultant or freelancer. There's a distinction made between independent contractors and employees. They are treated differently in how their income is taxed and reported to the IRS.
For example, if I hire a Web designer to redesign my site, I would ask them to fill out a W-9. I would then use that information, first, to verify their name and address; and second, to issue them tax form 1099-MISC at the end of the year. Form 1099-MISC is used to report money paid to contractors for their services. This form is send to both the IRS and to the contractor.
Now there's a couple of issues I can foresee that this reader might want to take into consideration. First, is whether he thinks the company is reputable and he will definitely be working for them. The reason I mention this, is that I have grave misgivings over how frequently our Social Security numbers are given out and now floating around in various files, databases, and hard drives by various companies. Like all tax forms, the information on a W-9 must be kept private, secure and confidential. Any person or company that discloses tax information without the person's permission can face severe penalties. In this sense, it is better to safeguard any SSNs and other tax information.
On the other hand, the company is required to obtain your legal name and SSN using Form W-9 if the independent contractor will be earning more than $600 from the company during the year.
I do have a second concern, and that's whether this reader is an independent contractor or an employee. The difference impacts how income is reported and what tax rates apply. Independent contractors act as consultants or outside experts who usually work on a specific project for a company. Employees, on the other hand, are hired to work for the company and the company provides extensive tools, resources, and training for employees to do their job. The difference between the two involves the degree of control exercised over the worker.
For tax purposes, employees receive wages which are subject to income tax and various payroll taxes for Social Security, Medicare, and various state and local taxes. Independent contractors are also subject to the income tax and to the self-employment tax, which covers Social Security and Medicare. There's two big differences here. One is that employees are taxed on the full amount of their wages, whereas independent contractors are taxed only on their net profits (meaning after business expenses are deducted). This can result in a lower tax liability for independent contractors. On the other hand, companies are required to pay have the payroll taxes for Social Security and Medicare for employees. Independent contractors are required to pay both the employees and employers share of these taxes, and the client would not have to be responsible for any of these taxes. Companies that are looking to keep their overall expenses low often prefer to hire contractors so the company won't have to be on the hook for payroll taxes. Workers who do not have to pay for a lot of out of pocket expenses, however, fare better as employees since the company pays half of these payroll taxes.
Finally, there are different types of recordkeeping and planning you will want to do. As an employee, there's not much to keep track of. The employer will send employees a Form W-2 at the end of the year which shows how much wages were paid and how much was deducted for taxes. Independent contractors, however, need to keep track of income as they earn it, along with any expenses related to their job, and may need to pay taxes in advance through quarterly estimated taxes. As a contractor, it is usually advantageous to be working with an experienced tax professional who can help set up a record keeping system and provide advice and strategies. More information:
Comments
I have been researching this w-9 all day, and am confused. I have worked full time for a company for the past 6 1/2 years. I get w-2’s at the end of the year, no problem. Last year, they announced that we had won an “award” and that they were going to invest it for us, to be paid if you stayed with the company through 12/08. Today, we all received form w-9 to fill out. Are they paying the “award” this way so that we don’t have any taxes taken out of the inital amount? I know in the past that a “bonus” means that almost 1/2 goes to the IRS. If we are full time employees, can the “award” be paid this way with no inital taxes out, and will it cost me more at the end of the year? HELP!!!!!!
Corinne, there’s not enough information to really say what’s going on in this situation. Speaking in the most general terms, any income the company has received (including awards and investment income) is taxable at corporate tax rates. Any payments made to employees are treated as wages (i.e., they go on your W-2 and have all the withholding requirements). This is the general rule.
Some companies set up certain types of profit sharing, bonus, stock option, or other types of incentive programs. However, the general rule still applies. For example, in an incentive stock option program, any gains from the stock options are taxed as wages (with all the necessary withholding) unless certain holding periods are met.
In other words, I don’t see any reason for the company to request that employees fill out Form W-9. This form is used to request identifying information for non-wage payments. Now, it could be the case that the company has some different type of arrangement in mind, but then you should find out what kind of arrangement they are thinking of (that is, the technical names they are using for this plan), and that would then help us research this matter further.
Hi:
I earned a bit more than 6OO dollars from a blogging site. I was recently asked to mail in a W9 so that the site owner can mail me a 1099 misc form for the IRS.
I am blogging anonymously because some of the opinions shared on the blog are somewhat strong.
The W9 obviously requires my legal name and other personal information.
I am reluctant to give out this information.
Can I cover the legalities, and avoid any IRS penalties by simply filling out a 1099 and submitting it to the IRS on my own?
Well what i wanna kno is would the independent contractor be able to work and fill out a w4 form instead of a w9?
Sara, you should provide the Form W-9 to the web site owner. You have a professional relationship with them, and they will keep your name and other information confidential, if that’s the agreement you have with them. You cannot send in a 1099 for yourself. If you don’t submit a W9, the company could technically withhold 28% of your payments as backup withholding. One of the purposes of the W9 form is to verify that you are not subject to the backup withholding requirements.
Khali, no you cannot fill out a W4 instead of a W9 if you an independent contractor. W4 forms are only for employees, and are used to adjust the level of income tax withholding on their salaries. Independent contractors, by contrast, usually do not have taxes withheld from their payments. If you want taxes to be withheld, then leave the box for “exempt payee” unchecked, and your client will withholding a flat 28% of your payments as tax withholding.
I have been reading about the definitions of employees/independent contractors. I only worked for the company in question for 1.5 months and on a part-time basis. I worked in the office, used the company’s equipment, had to report on my progress, was given training/resources to accomplish particular tasks. Based upon my research, I believe I was a “common law employee.” I definitely want to pursue this, however, I am wondering if there are any possible repercussions. Clearly, if a determination letter is issued, the employer may be upset. Beyond that, I wonder what possible tax liability I might face. Further, how long does it generally take for the IRS to issue the letter? Also, there were others who were labeled as ICs; will they benefit from my filing (I hope). Finally, I made less than $2000 in this job – will the IRS really take the time to look into this?
Thanks so much for your help!
I started working Dec 18, 2008 at a local business as a telemarketer (I’m quitting April 24, 2009). Also, I’m an 18 year old, dependent, full time student and I plan on making no more than $3000 at this job.
The owner says that we’re all “independent contractors” and pays us an hourly wage that is called a bonus (He says he can’t legally pay us a wage because we’re independent contractors). He told us that every week we have to pay a $1 rental fee to the company for renting the cubicles and phones we use at his office. But he then adds that back in as a “bonus for smiling on the job” so our checks don’t reflect the deduction. Is this “rental fee” a way of making us contractors, because it’d mean we’d be using our own resources, despite them being free since the bonus is added back in?
We’ve never been asked to fill out a W9 but we did sign an extensive contract that had a clause denoting us as “independent contractors” and that we were responsible for paying all of our federal, state, and income taxes.
The actual language was, “The relationship between the Distributor (my “boss”) and Dealer (me) is that of vendor and vendee and all work and duties to be performed by Dealer shall be performed by him as an independent contractor, and Dealer shall not be treated as an employee with respect to any services for federal, state, local taxes and workers’ compensation purposes. Dealer understands that he is a self-employed individual and not the agent or employee of Distributor and has no authority to bind or obligate Distributor in any way whatsoever. Dealer understands his duty as a self-employed individual to assume full responsibility for the payment of his federal, state, and local income taxes and to pay self-employment social security taxes required by the Self-Employment Contribution Act (“SECA”). Dealer understands that he is solely responsible for:
A) Payment of any self-employment taxes which may be due by virtue of earnings made as an independent contractor under the terms of this Agreement;
B) Payment of any federal, state or local income taxes which may be due as a result of compensation earned as an independent contractor per the terms of this Agreement;
C) Payment of any federal, state or local quarterly tax payments which may result from federal, state or local income taxes due; and
D) Payment of self-employment social security taxes.”
My first reaction was that he just had us do this so he could avoid the 7.5% payment for the employer on our SS/Med tax.
But now I’m looking into it and if I truly am an independent contractor, I know I’ll have to fill out the 1040, 1040 SE and 1040 C (EZ). But I don’t know if I should fill out a W9 on my own, or what I can deduct or if I even have to pay quarterlies given that I’m working for such a short time.
i was just woundering if a person has worked in 2008 as a contract labor and had not filled out any paper work (W-9 or I-9)and now was sent a W-9 to fill out what does this mean. can they still file a 1099 on her. (without a SS#).
I’m curious about this as well. What happens if you can’t get a W9 filled out by the contractor? Is there any remediation available?