As a writer and Digital Strategy Specialist, I usually find myself working as an independent contractor with a 1099, which is great because in most cases, I do get to set my own rates and make my own rules because I am not technically an employee of the company that I am working with or representing so therefore, I don’t have to follow all of the rules of said company in favor of following my own rules and policies. However, when it comes to the legalities of being an independent contractor, especially with income and federal tax law, there are some downsides, which unfortunately usually cause me to run in the other direction when I respond to a job listing and the company wants to pay a low rate (but often above minimum wage) and have their employees file as independent contractors with 1099s at tax time.
Why would an employer want you to file as an independent contractor using the 1099 form?
There are many attractive reasons that a company would want you to be legally known as an independent contractor instead of an employee, such as:
- For an employee, the business would have to withhold income tax, Social Security, and Medicare from their wages. For an independent contractor, the business does not withhold taxes at all, as the independent contractor is instead responsible for the withholding of all taxes. That doesn’t seem so bad, until you realize that you have to pay a higher tax rate as an independent contractor AND employers are also legally required to match Social Security and Medicare withholdings, which means the amount you see on your pay stubs is simply your half that was taken out of your check as an employee and your employer paid the other half on your behalf as they are legally required to do.
- Labor laws and protections also do not apply to independent contractors, so the company you’re working with can legally discriminate against you, and you’re also not protected by wage and hour laws, which means the company does not have to abide by laws that address overtime and minimum wage protections, for example.
- Employers are legally required to pay into an unemployment fund for their employees, but if you’re an independent contractor, the company is not legally required to pay into an unemployment fund at all for you, nor do they have to provide any type of benefits.
Working as an independent contractor makes sense in some industries, such as for consultants, writers, plumbers, and others that work for many clients at once, as doing so allows you to be paid based on the job or project itself instead of the hours worked on it, claim more expenses on your taxes, and even can make it easier in the long run invest in your own equipment and have your own employees. However, it can have a downside, especially for those that are paid hourly, as someone making $10 per hour as an independent contractor really finds themselves taking home closer to $4-$6 an hour, roughly based on estimates from Hurdlr.com, depending on how many expenses an independent contractor has to spend to do their work, such as internet expenses, travel, etc.
It also may not be legal for companies to classify a person working for them as an independent contractor, especially if the company dictates how and when the work is done, offers an hourly rate, requires that you are trained by the company, and requires that you do work that could be considered an integral part of the company’s day-to-day operations.
*If you feel that your employer is taking advantage of you by misclassifying you as an independent contractor instead of an employee, I urge you to consult an attorney that practices employment law in your state, especially if you were fired as an employee to be rehired as independent contractor so that the company could cut costs.