Issue: If I have special skills, can I be an Independent Contractor?
Question: I am an individual with some special skills.Because of those skills I have been offered work but as an independent contractor.
Can I be an independent contractor? How will this income be taxed? Are the businesses that I work for required to give me a form 1099, and what is that exactly?
Answer: As an individual your business would be a sole proprietorship. A business will usually have a business name other than the name of its owner. The first sticky point with “independent contractors” is that the business looking for services from an individual needs to contract with that individual’s business and not that person. A contract with a person for their services is automatically an employment agreement.
So, if you are going to be an independent contractor you need to have a business with its own name. The simplest way to create a business name is to register with your state of residence to have a trade name, also known as a dba. A trade name is the name that an individual operates a business that is not their own name. The reason for registration is so someone can find out who owns the business should they need to contact the owner. Your business could also be a limited liability company or a corporation.
As a separate business your business can contract for your services under any acceptable terms with another business. Since determining independent contractor status with the government is based on facts and circumstances it is not a good idea to contract for payment by the hour, contracts are generally by the job or project with a set price for the work. It is also helpful in maintaining independent status if you contract with more than one other business for your services. Each business that you contract with is required to issue an IRS form 1099-Misc if they pay you $600 or more during any year. The form 1099-Misc is the form filed by the contracting business that is remitted to the IRS to enable to determine that the recipient has reported the income on their personal return. However, the form(s) 1099-Misc are not to be used to determine your income for your business, you are required to report all incomes earned by your business even if the amount earned from an individual business was less that the $600 or that business failed to issue the form 1099-Misc.
There are a number of other factors that are considered in the independent contractor determination. These include: completing the tasks at a location that is not the contracting business’s space; the contracting business may not provide the tools or equipment used to complete the tasks; the contracting business will not train the contractor how to complete the work; the contractor may not require the independent contractor to adhere to a time schedule determined by the contractor, and there are other factors that could be reviewed.
Sole proprietorship businesses report their incomes and related business expenses on a Schedule C attached to your form 1040 (Individual income tax). The net profit, income less allowable business expenses, is subject to TWO taxes. The first is “self-employment tax.” Self-employment tax is the same as the FICA and Medicare tax that is withheld on wages. However, as a self-employed person you are required to pay both the amount that would have been withheld by an employer and the amount that would have been matched by that employer. The total tax rate is 15.3%. The same net profit that was used to calculate SE tax is also subject to income tax at your personal rate.
Also be aware that having a sole proprietorship business will add at least two new forms to your personal income tax return.