“What is the difference between a 1099 and a 1040 from the point of the employee? How will this affect your budget? When is it legal or illegal for you to be considered a contractor?” – LearnVest
Form 1099 is a tax form sent to individuals by a company for miscellaneous income. It can be interest from a bank, dividends from a company which you own stock, or income from a company that you worked for as an independent contractor. You may receive several Form 1099s depending on the amount of miscellaneous income that you have in any tax year. Form 1040 is the tax form that you fill out each tax year, listing the amount of income that you have, deductions you claim, credits for various expenses, etc. Form 1040 will state the amount of tax owed to you as a refund or owed to the IRS. If you receive a Form 1099, you list the income on Form 1040 when you file your taxes, and provide a copy of the 1099 to the IRS if you mail in your return. Think of Form 1099 as another W2, which is the form received from your employer detailing the income you made during the tax year after withholding and various taxes.
Budgeting should not be affected. You receive 1099s for income that you earned, and you list that income on your 1040 when you file. If you budgeted for income from interest or dividends, you simply have to compare the budgeted amount to the actual amount received. This form simply states the total amount that you received.
Independent contractor vs. Employee
is a very hot topic in accounting and tax, because it is very subjective. The law is written in such a way to allow for interpretation. Generally, if a company anticipates that the project will be a one time occurrence
, then the contracted individual should be deemed an independent contractor. If the company anticipates that the project will be a long term occurrence
(over 1 year from beginning to completion), then the contracted individual should be deemed an employee of the company. There are several factors that should be considered when making the decision, as deemed by the tax court. These factors include behavior
(does the company control the time worked or does the worker?), finance
(does the company control how the worker is paid, provide the tools and supplies, and reimburse for expenses, or does the worker provide his/her own supplies?), and the type of relationship
(are there written contracts, employee type benefits provided, whether the relationship will continue after completion of the project, etc.), among other things. The company should weigh the factors equally, and then make the decision based on the analysis. The trouble with independent contractor vs. employee status is that each case is treated differently
, as no 2 cases are 100% alike.
As always, please consult with an Accountant or IRS directly if you have questions or need assistance with anything tax related. Our Ninja Accountants are always here to help and answer any and all accounting questions!