For tax purposes, you will need to understand how you are classified for employment purposes. This means understanding independent contractor vs employee.
Each Monday morning you head out the door and go to the office. You typically work a 40-hour work week unless the boss requires you to spend additional time at the office. On a designated day every week, you get a paycheck. Some companies pay weekly, others pay every two weeks, some twice monthly and still others, monthly. However, your paycheck is no mystery unless you work overtime and you get a few extra dollars for those extra hours. You are protected by both minimum wage laws as well as rules that prohibit your employer from making you work in excess of 40 hours without providing overtime pay.
Taxes and paychecks
For as much griping as you might do about it, your taxes for state, federal and social security come out of your paycheck before you take it home. Depending on the company it is likely they deduct for health insurance, life insurance and if offered, a 401(k) or pension plan deduction may be included.
Status for tax purposes
If all of these factors define your work status, you are properly classified as an employee. At the end of each calendar year, your employer will be required by law to supply you with a form W2 to allow you to file your taxes. There are distinct benefits to being an employee, in spite of what you may feel about your job. To understand these benefits, here is the scenario for an independent contractor.
Monday morning arrives
Independent contractors who do not have the luxury of long-term assignments may find that on Monday morning they feel like a ship without an anchor. The independent contractor is only too aware that they must spend their day marketing, searching for a new contract or exploring money-making opportunities. What is not very clear at this time is how much your next paycheck will be. What is even more disconcerting – how much will that paycheck be?
As the week goes along, you may work 4 days, 5 days or you may find that you have worked all 7 days. While some days you may have only put in 8 hours, it is probably more frequent that you put in more than 10 hours a day. Unfortunately, your pay does not always reflect the amount of time that you may have invested into your trade.
Taxes and paychecks
As an independent contractor it is up to you to keep track of your earnings. The Internal Revenue Service states that an independent contractor is subjected to self-employment taxes and must pay a percentage of Social Security taxes. It is typical for the self-employed person to pay estimated taxes on a quarterly basis while still filing the typical annual tax return.
Status for tax purposes
As an independent contractor, you are responsible for tracking your own earnings. Your clients are required by law to provide you with a Form 1099 not later than the end of January following the end of the calendar year. Independent contractors who have earned less than $600 from a single client will not receive a 1099 form however, the income must still be claimed.
Thousands of people who have lost their jobs or who are working jobs that they intensely dislike may be considering striking out on their own. Before doing so, make sure that you fully understand the differences between an independent contractor and an employee. It is far more than taxes, it is an entire way of life and those who decide that they wish to be an independent contractor must be prepared for a lack of financial security.
About Doreen Martel
Well-rounded freelance writer who contributes to various blogs, paid to write sites and revenue sharing sites. Doreen is legally blind and has worked at home for more than 10 years. She uses the lessons learned from this experience to enhance her writing and share information with others.
