Tell me about your 1099 contractor experience

Factual Questions
1

I just got off the phone with a prospective employer in my field who has a telecommuting position that sounds like a good fit for me. I would need to file as a 1099 which I have never done before. I’m reading what I can find about 1099’s online and plan to hire some professional tax help (for this and the music company we are trying to get off the ground for Mrs. WeHaveCookies), but of course I’m dying to know what my fellow Dopers have to say about their experiences.

Some questions off the top of my head:

Mrs. WeHaveCookies just bought (from our joint checking) a printer/scanner/fax/copier for her home-office job (which is not a 1099) and I would be wanting to use it as well. Would I be able to write it off even though it was purchased prior to my entering 1099 status, assuming I get the job?

Is there any sort of limit to the amount I can write-off for home office purchases in proportion to my salary? I’m not going to go nuts, but I will need a new puter and I have my eye on a mac…

Can I still work other non-1099 jobs part time, or multiple 1099 positions for multiple employers?

How much of a headache is the quarterly self-tax stuff?

How much of a headache is the self-insured stuff?

I’m stoked about this opportunity but not so stoked about having to take a crash course in an employment/tax/insurance arrangement that I’m completely ignorant of.

Any assistance/opinions are appreciated.

2

I offer my perspective as an HR person, leaving some of the more tax-related stuff to those with tax knowledge.

Printer - fax - scanner - Is this for her job as someone else’s employee or her self-employment at home? If it is for her job as someone else’s employee and she is buying this herself, my concern is that she and her employer may not have thoughtfully considered how to handle expenses for a WAH employee. WAH really shouldn’t mean the employee is buying all their supplies, paying all their postage and long distance, etc. This leads to problems. But really, I think my advice is the same either way regarding your use of it. Don’t make this more difficult than it has to be. If you are going to be self-employed as a 1099 contractor, buy your own stuff and take the tax deduction. You’ll only make a huge headache by mixing multiple companies up in the deduction of a printer.

Working for multiple employers may depend on the specific terms of the contract, but in general, yes, lots of people do 1099 work for multiple employers.

The headaches associated with being self-insured will depend on how things go in DC over the next few days. Any advice now will be premature :). Currently, if you are anything other than a young healthy person, it’s quite a headache.

One thing you will want to be familiar with is the IRS 20-factor test, which is how they tell contractors apart from employees. If your situation sounds more like an employee, but they are calling you a contractor, that’s often a bad sign. Here’s a link: http://www.mdc.edu/hr/Operations/AFS/IRSFactorTest.pdf

3

You can work all the 1099 and W-2 jobs that your body can handle in a year–even simultaneously. The government has no limit and next January 28, all the employers should send you the appropriate forms.

The only serious hassle with the quarterly filing, (although more paperwork is never fun), is setting the discipline to hold out enough cash each paycheck to write the feds and state a check.

Since companies are not paying 1099 employees any benefits, (health, pension/401k, unemployemnt tax, etc.), 1099 wages have tended to be higher than W-2 wages–with the understanding that the employee had to go buy all the extras. A person covered under a spouse’s health program, for example, might make out OK while someone who needed to buy insurance without the protection of a group plan’s lower rates might get screwed, badly.
In today’s buyer’s employment market, many companies are trimming at both ends–failing to hire W-2 workers to avoid those costs while not paying 1099 workers enough to cover their expenses. That’s just life in these wonderful times.*

The biggest danger to people working under 1099 for the first time has been to see the “huge” take home pay, not set enough aside for the taxes and insurance, and then get hammered with an insurmountable bill at the end of the year. Talking to a decent tax accountant should help you avoid that.

  • This situation has led to the 20-question test that Harriet the Spry mentioned. (This actually goes back to the 1986 tax reform legislation.) Companies always want to have it both ways–not paying benefits while not paying wages–and many will try to claim employees as contractors even though their actual status is more that of an in-house employee. While it is the company that is breaking the law in those cases, the IRS decision to “rectify” the situation can often have a negative impact on the employee. So be sure that when you are offered a contractor/1099 position, you are firmly within the law as noted in Harriet’s link.
4

I do 1099 work AND regular W-2 work.

What my accountant did was set me up as a sole proprietorship, and there are a lot of benefits you can get in the first year, such as deductions for computers, fax machines, etc.

I don’t do the quarterly thing because, quite frankly, I usually get a refund from the regular job and the 1099 income doesn’t offset it entirely, so my accountant said I didn’t need to. But if that’s your only income it’s a good idea, kind of like withholding. It avoids having to get a loan to pay your taxes, which is a very bad idea.

There is a lot of recordkeeping. I pretty much do what my accountant says, and he sends me a sheet at the end of the year detailing what he needs in order to file my taxes. (You can deduct the accountant’s fee.)

5

Are your certain it’s not a scam?

6

Only two things I can think of, in my extremely limited experience.

Keep receipts. Don’t spend all your money, the government wants their cut.

7

Beyond certain and vetted through highly trusted network contacts. It is actually the scammers I’d be working to disrupt. :slight_smile:

I’m not too concerned with trying to recoup any costs with the printer, it was more of a hypothetical question as my partner and I both may be looking at unrelated sole proprietorships, with mine likely to be set in motion first, and we’ll likely be sharing some common equipment. We’ll probably just hold off on making any more office purchases until if/when this job for me solidifies and I can just do the writing off for anything we’d both use. The apparent alternative of us both buying our own individual pieces of easily sharable office equipment seems extremely wasteful.

I do appreciate the advice regarding my partner’s working-at-home situation as well, but the flexibility that we’re getting for her continued income from them through and after our move across the state is more than worth making a few purchases on her own. Purchases that will enable her to transition from her office job to a home office job for this same employer. Her employer is also meeting her halfway with the few items she would need to purchase, and everything she had planned to buy on her own are things we would be able and likely to use personally as well.

The possibility of a contract position for me just came up today, hence all of these questions and hypotheticals. Once we’re ready to move forward with the whole music company idea, she will be purchasing and writing off things that I will have no business use for at all, so it is really the few items likely to have overlapping use that I was curious about.

I will certainly go through that IRS checklist before I speak to this prospective employer again so that I can clarify any grey areas.

Thanks for the links and suggestions so far.

8

Me/Hubby have been contractors for going on 10 years now.

Here’s my advice:

  • really think about your rates. You don’t get ANY benefits, meaning you need to pay your own taxes (more than if you were an employee), contribute to your own retirement plan, pay for your own sick days/vacations/holidays, pay for your own office supplies, and pay your own insurance. This adds up easily to 25-30% extra expense on top of salary, and that’s not counting any equipment you need to buy.

  • Speaking of insurance, health insurance is expensive nowadays, and if you have any health issues, you might have trouble getting it at all. Hopefully we’ll have some changes that will fix some of that, but that won’t help you right now.

  • You can write off the part of your house that you use as an office. It helps if you actually have a separate room with a door; the IRS doesn’t really like you writing off a corner of your living room, for example. And, as you mentioned, any equipment you buy can be written off as well.

  • LOTS of stuff can be written off, stuff that I’d never expected. Our CPA works with us and is worth the money he charges. He even managed to write off our across-the-country move a few years ago. If you’re going to be in the 1099 business for the long run, I’d highly encourage you to find a good CPA.

  • Don’t screw around with taxes. Have two separate bank accounts; when you get a check, take out the percent that’s your taxes (your CPA can help you figure this out) and put it in the Tax account and pretend it doesn’t exist. Pay your quarterlies on time. Really. Absolutely nothing sucks more than having to pay catch-up with taxes. And don’t be like one person I know, who can’t seem to get it through her head that if she doesn’t get a W2 with the income on it, she still has to pay taxes on that money. I’m waiting for that person’s life to go to hell when the IRS finds all the money over the last few years that she hasn’t claimed or paid taxes on.

Overall, being self-employed is a little scarier than being an employee, but I personally love it. Have fun!

9

Was it purchased this calendar year? I think you can make the case that it was purchased for business purposes and still write off the purchase. The issue would be whether you’re required to depreciate it, or can write off the full amount. Check the tax instructions on that – it used to be you could write off the full cost of a computer, but I think now you need to depreciate it over several years (not hard, but you need to keep track of it).

You can write off any legitimate business expenses. There is no limit. Yes, you can write off more than you earned.

What you do have to prove to the satisfaction of the IRS that you are running a business and that this is a legitimate business expense. But I have often had years when my writing didn’t earn more than my expenses, but took all the deductions anyway.

The IRS has a rule of thumb that you need to make a profit in three out of five years or else you’re classified as a hobby and can’t get deductions. However, even if you lost money every year, if you can show that you are legitimately trying to earn a living through your business, the IRS will allow the deductions.

A tax expert once told me to take any legitimate deduction for business expenses you can. If the IRS rules it’s not allowed, you’re only out the amount you claimed plus interest, and the IRS is usually pretty fair about this.

Sure. You can get income from any source you wish, as a contractor as a paid employee. As long as you report it all, the IRS is happy.

The form is simple – it’s much like this joke. You have to estimate your income for the year, but you’re not expected to get it 100% right. The form gives you an idea of how much to send. Once you get a rough number, send in the quarterly amount (which can be adjusted if things change). The IRS only is concerned if you’re too short at the end of the year.

You mean the Social Security tax? It’s a line on the Schedule C, which tells you how to calculate it from your self-employment income. I think the Estimate Tax includes it, too. Not a big deal.

10

Agree with what others say. From a tax standpoint, have a dedicated office and write that off. I have eight rooms in my house, one of them is my office. Size doesn’t matter, number does. I can deduct one-eighth of utilities and anything else on the whole house that goes toward maintaining the office. And all office furniture and supplies, all computer hardware and software, etc., is fully deductible.

However, here’s the thing that many people forget. When you sell you house, one-eighth of it will be treated as a business and subject to capital gains taxes that aren’t applied on the other seven-eighths. You need to run the numbers to see if that will be a problem for you.

And one possible point of confusion. You are not a 1099. Your employer files a 1099 misc. form with the IRS stating your wages for the year. You get copies that you need to file. But that’s really nothing more than a receipt. You’d have to report that income in any case (if you’re honest). And companies only have to file 1099 misc. if they pay $600 or more during the calendar year. So the IRS doesn’t even expect that your income and your 1099s match up (as long as your reported income is larger). They’re just a cross reference to make sure you report and that you report more.

What you file is the Schedule C. And that’s mostly a line for income and lots and lots of wonderful lines for deductions. Remember, as a new business you’re almost expected to operate as a loss in the beginning.

The IRS does have rules that you must report a profit occasionally (I think at least 2 in every 5 years) so that you aren’t just writing off a hobby. That doesn’t sound like a concern to you, though.

11

Almost everyone who starts working from home thinks it’s totally worth it to buy their own stuff. It’s all fun and games until something goes wrong at a bad time. All of a sudden it’s *your *printer that broke on the big deadline, not the company’s printer. So I’d just say take that into consideration. Is her employer really satisfied with the idea that her plan to support their business’s printing needs is using her husband’s company’s printer? I realize this isn’t just about a printer, so repeat as necessary for various items of equipment.

You also need to be sensitive about how this could affect tax deductibility. I don’t know the answer, but is there a chance the IRS could say the printer wasn’t really for your business, but just something your wife wanted for convenience in working at home and now you’re trying to deduct it?

I’m not trying to be discouraging, good luck to you both.

12

A printer or copier is probably not an expense that can be immediately written off, more likely it will be a capital expense subject to depreciation. I don’t know if the IRS is still allowing accelerated depreciation. In any event, talk to an accountant before you start writing everything off.

13

There are differences between being a contractor and being a freelancer. Freelancers usually work for a variety of employers who expect them to have the full complement of tools needed to do the job. Contractors who mainly work for one company for long periods of time may be able to get the company to supply them with tools. I don’t know the OP’s relationship so I can’t say which role will fit.

I don’t want to get into the details of depreciation either. But copiers and printers today can be had for $100. You expense that, not depreciate it. Of course, if your job required a $5000 printer/copier that would be handled very differently. The same goes for all the other tools that you need. This is why having a CPA do your taxes is a bargain.

BTW, the IRS audits only 1% of all returns for less than $200,000 and that percentage is going down. It’s not worth their time and effort.

14

I’m not her husband. We are living in lesbian sin. :slight_smile: And we will certainly be looking take Harriet’s advice to heart about anything equipment-wise that we feel is sharable.

We’ll be renting our next house, probably for a couple of years at least while we are looking for something to buy. The dedicated office room deductions may be difficult for us to pull off though at our rental. It is a 3 bedroom with an open and airy den off of the kitchen. We were planning to devote one of the spare bedrooms to my partner’s office and I was going to set up in front of the nice big window in the den, but the den is too big not to share space with non-office items and furniture. If the IRS would have problems with my having a couch, TV and game consoles in the same space, it doesn’t sound like I’ll be able to write off a room. It also doesn’t sound like a good idea to try and pass her office off as mine, and we can’t really hide the extra queen bed that will be in the 3rd bedroom.

In general, it doesn’t sound like I want to have the IRS anywhere involved in the feng shui of our new home and some reasonable deductions may need to be scrapped as a result.

15

And based on what I know about the job so far, all I will need for my job will be a computer, broadband, a phone (landline or cell, not both), and occasional faxing/printing.

16

Agreed, although equipment does influence the 20-factor test. But either way, looking at it from the perspective of the wife’s employer, do they really want their printing to rely on a printer belonging to another company, either the freelancer or the contractor’s customer/employer? IMHO you are either talking about a trivial $150 printer, or you are talking about an expensive printer that people are really going to care about who owns and controls it. Either way, I see sharing as a headache that will often not be worth it.

While the odds of getting audited in any given year are not high, it helps keep them low if everything follows a coherent storyline.

ETA: Ooops, sorry about the gender bending.

17

One bit in addition to what others have said: it’s not enough to add the cost of your health insurance and whatever other benefits you want to buy, you have to gross-up that amount. Remember that if an employer pays (say) $10,000 for your health care, that’s not taxable income to you. If an employer pays you (as a 1099 contractor) $10,000 to buy health care, that IS taxable to you, so you might only keep $8,000 (if your effective tax rate was 20%, say.)

So, if you need $10,000 to buy health insurance, you need to ask for at least $12,500. The formula is, if you need X, ask for X/(1-r) where r is the marginal tax rate. Thus, at a 20% tax rate, you need to ask for X/(1-.20) = X/.8 = X*1.25.

One of the ways that companies [del]screw contract employees[/del] save money is by taking advantage of the novice 1099-er’s naivete.

18

There are now ways for the self-employed to deduct the cost of health insurance they buy on an individual basis. Some restrictions apply, but don’t assume you can’t deduct.

19

Bear in mind also that you will be paying both the employer and employee portions of FICA - that’s 15.3% of the schedule C profit instead of the 7.65% an employer normally withholds fromyour adjusted gross paycheck.

20

You can’t deduct rent payments for your residence, so my comments were only applicable to houses that you own. You can’t write off rooms in a rental so don’t worry about what you put in there.