I've noticed a lot of people are taking jobs as an independent contractor, sometimes to supplement their income, and sometimes as a way to build a career as their own boss. I'm generally in favor of people being their own boss. It's a rewarding career path and can pay off financially. Nonetheless I do get concerned, and perhaps a little protective, when I hear from new college graduates and other people just entering the workforce that a company is going to treat them as independent contractors. Sometimes this is legitimate, but sometimes this is a move on the part of companies to avoid paying payroll taxes at the expense of their workers.
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 (after business expenses are deducted). This could result in a lower tax liability for independent contractors. On the other hand, companies are required to pay half 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:
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?
My husband recieved a 1099 separate from his W-2, for his employee bonus. Can his employer do this?
My husband was never informed of this .
Hello I was wondering, I work as a driver to deliver auto parts for a company and I have noticed that they send me the 1099 misc and also that my payroll doesn’t say they take off from medicare, social security, or taxes. Does that mean they consider me self-employed even if I work for this auto part company? and how would I fill out my taxes? under what form?
I paid a contractor without getting a w-9 or tax id. What do I do now? He is not answering my request for the info.
I use a portable employer of record. The two most well known are MBO Partners and Solo W-2. It saves me the trouble of hiring an accountant because I remain under their W2 umbrella.
I’m certifying as an independent contractor for Arise and they are requesting a w-9 to be filled out. They only deal with corporations. I have an EIN number (filled out ss-4) but I’m not sure how to fill out the w-9. Can I put on the W-9 my EIN number and click corporation since I will only get a 1099-Misc at the end of the year?
Hi…I found an ad on CL that was needing a sign holder for their business, we chatted over the phone and he needs me to come in the next day and fill out a w9, I wasn’t thinking at the time so I just said okay…but now that I’ve looked up what a w9 is…(still rather confused) is that the right thing for me to fill out? I thought I would be an employee, does a w9 penalize me anyway? I never do any of this tax stuff I always use H&R block so I’m pretty confused.
I forgot to mention it’s 10$ an hour but only on the weekends for 4 hours a day….so $80 for both days my sister isn’t entirely familiar with this either but she said it wouldn’t be worth it to work only the two days a week if I fill out a w9….
I just landed a contract writing explanations of high-school textbook problems for an online tutoring company. They will be paying me $500 for my work. Does this mean I do not have to fill out the W-9 they sent me?
I am residing overseas outside of US, and have just quit my company and am planning to work independently.
I had 2 questions:
1) When I file a W-9 when I take on an independent assignment, is it ok to give a foreign address?
2) Do I need to file a W-9 immediately to indicate to IRS that I have quit my company?
Thanks,
-souzem
Hi.
i’m a newly independent contractor. am not a U.S. citizen and i’m living in different country. i was recently awarded a project and they already send the payment and they’re requesting me to fill out the W-9.
is it the right tax form for me to fill out? i am living outside the US and i’m not their citizen. pls help with what should be the appropriate IRS form i should give to my client.
thanks.
Sounds like you may need fill out the Form W-8BEN instead.
When I did my taxes last year, I had both W2 and 1099s, with the 1099s being around $3000. With not working the whole fiscal year and deductions and credits, I didn’t have to pay any taxes overall (in fact got a return even with the W2 withholdings). As for the fiscal year 2011, about 95% of my income will be 1099s, and I wasn’t even aware of quarterly payments until a few weeks ago.
My questions are: 1) will I have to pay a penalty because I didn’t make quarterly payments this year? 2) Even if I were to make quarterly payments, what would I have to base it off on since this is the first year that I have 1099 income?
1. YES If you expect to owe at least $1,000 in tax for 2011, after subtracting your withholding and refundable credits
please review this to determine if you’ll be penalized. http://www.irs.gov/publications/p505/ch02.html
2. That is why they call it estimated tax, hopefully you know how much you’ll make during a year, you can figure your required payment for each period by dividing your annual estimated tax due (line 16a of the 2011 Estimated Tax Worksheet) by 4. However, use this method only if your income is basically the same throughout the year. please review this to determine how to estimate your tax.
http://www.irs.gov/publications/p505/ch02.html
Good luck!
I just started a new job yesterday – I’m a Teacher’s Assistant in an after-school program. Throughout the interview process I was NEVER told that I would be an independent contractor. It wasn’t until I was signing my paperwork yesterday that I saw it mentioned on one little line, and I asked about it. I was told that yes, I am now an independent contractor. I have never heard of such a thing for this type of work. I’m a little confused to be honest. The place that hired me has contracted with the school to hold the after-school program for them. However, we don’t see any actual money from the school/parents. Also the company is requiring a lot of up-front training, and they supply some of the supplies whereas we (the teachers) have to supply the rest. I’m more then willing to answer any questions…I’m just basically trying to find out if I truly am an IC or employee. I’m also just making minimum wage.
I was hired as an independent contractor and is wondering if the 1099 has to put in my name or can it be in my husband’s name? He also has a W9 fill out as well but the paid was in my name. Please let me know.
I worked for a mowing company last summer and this summer and i was told i was contract labor, after filing my taxes this year i have came to the conclusion i paid more into taxes than i normally would if i were an employee. After reading the differences between what contract labor and an employee is, it is obvious that i am an employee. I was wondering exactly how much extra in taxes i am paying. I realize i am paying Social Security and medicare twice (employer & employee) since i am supposively self employed. I am also paying State and Federal Income tax. I made 5500 last year. so how much extra did I end up paying into taxes since I am not an employee and how should i handle this situation with the company I am with?
I have been working with a company that pays me a flat amount ever two weeks (1008.00) When I started they told me I would have an W9 at the end of the year for my taxes. I have never done this before. I have no idea if I would have to pay the goverment taxes. I have always done my taxes myself and recieved money back. I just bought a trailer this year and a new car. I married and have two kids. What should I have to pay in or do I? If so how much and when?
Hi,
I am a book editor and I receive annual royalty checks and 1099 MISC forms for whih I pay income tax. However, two years in a row the publisher mailed my checks and the 1099 MISC forms to a company that I worked with many years before, but I was not currently with in those respective years. That company cashed my checks withou my signature or knowledge. I learned about that only when IRS demanded additional tax for the royalty income that I have never received. I have paid the additional tax for two years and I negotiate with that company to give my money back. They agreed today and asked me to fill a VENDOR information form and a FORM W-9. If I fill as a vendor I am worried that they will report to IRS that money returned to me and I will be taxed a second time. I have proof from IRS that I have paid tax on money I have not received, but how to proceed ? Is there a way to have this money returned to me without tax consequences ?
Thank you,
Cristian
Hello, Christian, and thanks for posting your question. There’s the easy answer and the long answer. The easy answer is that you will need to fill out a Form W-9 so that the company can issue you payment. That company is required to send you a 1099-MISC if they pay you more than $600 during the course of the year. So the W-9 request is valid, and in all likelihood you will get a 1099-MISC for this payment.
The long answer is figuring out how to properly report your income. I can think of two options. Option 1 is to remove this income from your previous returns and report the income on your current year return. I believe this is the proper treatment under the constructive receipt principle. This principle states that for taxpayers using the cash method of accounting (which most individuals use), income is reported and tax in the year the income is received. To effect this treatment, you will need to convince the IRS that your previous tax returns need to be revised to remove the additional income. Option 2 is to report this income on your current year return and show an adjusting deduction to remove that income, and attach a statement that this income was reported and taxed in a previous year but was paid to you this year. I believe this second method is technically improper, but you might find it preferable over revising your previous returns. Your tax professional can assist you in analyzing these options and in making sure your tax returns (for previous and current years) are filed properly.
After weeks of searching the Internet for answers to my tax question concerning Independent Contracting, I found this “About.com” website with you answering three questions I had. Also, the question and answers from this website page, answered 4 more of my questions. Thanks!
Where is the line drawn as to who is required to fill out W-9s and who is to supply 1099s?
EXAMPLE: I hire independent contractor (IC) or roofing business to re-roof my house. Does the IC/business need to fill out a W-9 and give to me so I can then supply them with a 1099?
If that is the case then people would get nothing done for filling out IRS forms for every little repair, job, or other transaction done in the normal course of life.
Where is the distinction between needing to supply W-9s & 1099s versus simply paying someone/some business and then that person/business reports the transaction as income on their own.
Wal-Mart doesn’t give every customer a W-9 and every customer doesn’t supply Wal-mart with a 1099 at year end. Where is that magic line and how is it defined exactly for the IRS?
Adding to my previous post … (just so we can confuse IRS regulations more) …
Technically MANY, MANY people and businesses can be deemed independent contractors.
See this page: http://biztaxlaw.about.com/od/glossaryi/a/indcontractor.htm
IT STATES: “An independent contractor is an individual or business that provides services to another individual or business. The independent contractor is a separate business entity and is not considered an employee.”
Read carefully … It doesn’t say an IC can’t have employees of its own — the IC just has to be independent of (ie, separate from) YOU and/or YOUR BUSINESS (thus not the your employee). And the IC is providing your a service.
Doesn’t most everything fall into this category then? Your grocer, roofer, utility company, insurance agent, restaurant, neighborhood lawn mower or babysitter*, etc. etc. etc. You, or your business, is separate from each and every one of these entities – none of them are your employees – and every one provides you a service in return.
Why isn’t the majority of America required to fill out W-9s and 1099s?
————
*DISCLAIMER: The babysitter (or lawn boy) could be considered an employee if you have major authority over how they do their job.
EXAMPLE: If the babysitter sits in your home (as opposed to you taking the kids to a daycare site) then the babysitter is most likely an employee. Likewise, if the lawn boy does not use his own equipment but rather your mower-gas-etc. he may be considered an employee.
The Nanny Tax/Household Employee debate is another can of worms …
Help! I was recently hired by a family owned business, the woman I work for runs the business out of her home. I file taxes every year, with 2 children and typically working a regular hourly wage job, I ususally get a lump sum back with my taxes after filing and filling out a w2 form. My current employer has me filling out invoices of my hours and that is what she uses to determine my bi weekly paychecks. I’ve asked her if I need to fill out a w-2 and she told me No that I would need fill out a 1099. This is my first independent job outside of waittessing for tips only. Please help me clarify what are the correct forms I should be filling out to help me avoid messing up my taxes this year. Thank you for your time.
I have been hired as a home health aid and am considered an independent contractor. I will be working for about six hours a day for one individual and I also collect social security. I believe that the IRS should have a different category other than independent contractor as I do not and will not have the opportunity to actually run an actual business. I will have to be prepared to pay 30% of my income to taxes. HHA’s don’t make a lot of money. but, I’ll have to pay out about 800+ per month. ( not seeing much advancement here.) Do I need a business license? What types of deductions can actually quality for my work? I do very limited paper work..but I will provide my own paper, copies, faxes, and provide my own cleaning products to the client because it is easier for me. Will I be able to deduct a portion of my home for the storage and use of computer, supplies, I will use for the job. Will I be able to deduct at least an equal portion for my property tax? Besides Social Security, and Medicare what other taxes will I have to pay? What can I expect to spend on various forms of state taxes? Can I deduct state taxes and sales taxes on items I purchase for the job?
I’m about to take on a consulting job and was sent a w-9 from the company with THEIR information filled out. That is, the company name and address was at the top, they entered the employer id number, and under part 2, where the signature is, someone from the company filled it out. But I thought I, as the contractor, was supposed to fill in my own information. Am I incorrect, or did they maybe accidentally send me the wrong thing (or an example of what it is supposed to look like?) Thanks for any help!
Hello,
I casually go through the postings on craigslist for work from home positions. I am leery of the postings on there, however I feel like I have experienced enough scam attempts to know the difference. I finally came across one that I truly believe is legitimate. It is for a website that narrows down classes and camps in your area for your child(ren). I spoke with someone today regarding the position and asked a million questions. I know that I get paid 60% of the initial fee paid to the site when I close the sale. I was given the link to the w9 form and independent consultant agreement. I know that I am not considered an employee and that I will be working pt 15-20ish hours. They say the goal income for the month with that amount of hours is $1000+… It seems they are very flexible with everything such as when you work, and how to contact. They even provide me with the leads. With the taxes that I will need to take out, will it be worth it? I am scared of giving out my info on a w9 to a company that I can’t go to (I am in ky they are in cali.) Sorry if my questions were silly! I am just trying to make sure this is the right call! Thank you!
So I have worked part of 2012 as an employee (5-6 months) and the rest of the year as an independent contractor. What taxes am I liable for when I file my taxes next spring? Let’s say for example I made 5K as an employee, $17,000 with one company as a contractor and $1,200 with another company as a contractor. This makes for a total of $23,200. Let’s say I file as a single filer. Can I use the standard deduction of $5900 to apply to my ~$23K, leaving me with an income tax liability of .10 * 8700 + .15 * 8600 (23,200-5900-8700) = 2160? Do I owe the self-employment tax on top of this? How much would I owe? Thanks!
Hi I have some questions and need clarification.
I was offered a job in California (I live in California) doing admin assisting for a cigar company that is supposedly one of the best around and it’s a fairly new company.
Any how, It pays $12 an hour. BUT he said I would be considered an “independent contractor” He told me that they like to Give the FULL amount to their people that work for them…
*8 hr shift mon- fri and occasional trips out of state with the owner for Cigar shows*
I would be practically running the office and doing inventory
Is this something I should consider?
Is this a good opportunity for me?
What taxes would I have to pay as an independent contractor?
Erwin, first review the differences between being an independent contractor and being an employee. It is likely, considering the details you describe, that the job really should be classified as employee rather than as an independent contractor….. Now to move on to your question, what taxes would you pay as an independent contractor? This would be called self-employment income, which is subject to federal and state income taxes, plus Social Security and Medicare taxes (at their full 15.3% rate).
You spelled “half” incorrectly as “have.” You should have written:
…companies are required to pay half the payroll taxes for Social Security and Medicare for employees…
Good info. Thanks for the article.
I have corrected my spelling error. Thank you.
I just started working for a realtor and he is wanting to pay me a set amount twice a month. He said that at the end of the year he will pay give me a 1099 to file for my taxes.
I am concerned about this and not sure if this is the right thing to do or not.
Any advice.
I do not have my real estate license yet but will have it soon.