1099 situation question...?

Question

I'm a stay at home mother and my neighbor asked if I wanted to do some data entry for her at her home office in a "1099" type of situation. I have NO idea what this means besides it being a tax form for a contractor/subcontractor. Do I have to legally have a business or any type of licenses in order to do this? I want to make sure that everything is done legally. In order to accept this position what do I need to know about the legal ramifications? What about when I file for taxes? -thanx

Answer 1

Employees get paid on a W-2. Contractors get paid with a 1099. Here are the differences:

W-2 (employee), your employer:
- sets your hours.
- tells you what to do and how to do it.
- pays for most of your supplies and costs.
- withholds federal and state income tax from your pay
- withholds FICA tax from your pay
- matches what you pay into FICA with an equal amount from their pocket

1099 (contractor), the employer:

- does not set your hours
- tells you what needs to be done, but not when or how to do it
- does not withhold anything from your pay

If you are legitimately a contractor and get paid on a 1099, you are responsible for making "quarterly" payments to the IRS to cover your federal income tax and FICA (social security and Medicare) tax. You may also have to make estimated payments to your state for income tax purposes. You will have to fill out a Schedule C when you do your taxes as well as a Schedule SE to figure out your FICA tax. You do NOT need a license just to get paid on a 1099.

Some people don't have to make estimated federal payments because they get so much credit that it offsets federal taxes and FICA taxes. I'm speaking mainly of the Earned Income Credit.

You said you are a stay-at-home mother, but you didn't mention a husband. If you have one and if he has income, you can have him withhold more from his W-2 paycheck so you don't have to make estimated payments.

A lot of people like to pay on a 1099 because the accounting is so much easier for them AND because they don't have to pay payroll taxes (FICA and FUTA) which can cost over 16% more. For example, for every dollar they pay someone on a W-2, they have to pay an additional 16 cents because of payroll. However, the onus falls onto your lap. While you don't have to pay FUTA, you do have to pay your social security and Medicare PLUS the other have that your employer would have had to pay had you been paid on a W-2.

Sound confusing? It is. You may want to see a tax professional to have them determine your estimated payments. Remember, it is easier for your spouse to simply increase their withholding rather than make estimated payments. You get the same "credit" regardless.

Hope this helps :)

Answer 2

What this means is your employer will report all of your income to the IRS using form 1099. A copy will be sent to you so you can report and pay all, repeat all taxes on this income stream. If the employer does not use a 1099 your income cannot be deducted as a business expense. Normally a business takes care of reporting and paying an employee's taxes. In your case you are a contractor and are responsible for paying all the taxes on the payments you receive..

Answer 3

You do not have to have any kind of business license to be paid in a "1099 situation".
Your neighbor will need your social security number to report the 1099 to the IRS.
When you file your taxes, you will file a schedule C with your 1040, and report your 1099 income there.
You will pay self employement taxes on this income.

Answer 4

Simple put. You are a contractor. She is going to pay you but unlike wage earning she is not going to pay/submit any tax withholdings. This means you get more up front but you may be liable for FICA and social securty tax as well as income tax.

You end up paying double FICA and social security taxes in the end. Normally an employer pays half those taxes. Its not much but can add up.

Answer 5

No, you would not need to have a license. She's offering to pay you tax free, free of SS, Medicare, etc. Now if the amount you make in a year is high, say over 5,000, Uncle Sam gonna want a chunk of that, and your state taxes also. You can find income tax rates at irs.gov, and check your state income tax rates. You probably be ok on your taxes, but by getting a business license you could have some tax advantages to use(writing off gas used to commute to work).