If you’re an attorney working as an independent contractor, determining how you will be labeled and taxed as a contracted employee includes getting to know the way the IRS classifies you as a worker. When it comes down to it, the company you are contracted with will need to decide if a W-2 or 1099 is filed. To help you better understand what this means for you, we break it down so you can fully understand before you commit and contracts are signed.
There are two primary differences between an employee’s and a contractor’s tax obligations: how and when they pay tax to the IRS, and what forms they are required to submit.
As a worker earning a salary or wage, you are used to receiving Form W-2 in the mail at the end of the year. IRS Form 1099 is the tax return form you’ll receive as self-employed individual from any client who has paid you at least $600 during the tax year. (Self-employed individuals are defined as anyone who carries on a trade or business as a sole proprietor or an independent contractor, are a member of a partnership that carries on a trade or business, or anyone who is in business for themselves, including part-time.) . Even if you are working under a contract company, like LexInsight, you will still receive a 1099 as an eDiscovery professional.
The biggest difference between a full-time employee and a contracted employee is simple: determining who pays what, and when. Because you don’t have an employer who normally withholds these taxes, you could also be subject to paying an estimated quarterly tax. Much like you, the government doesn’t like waiting to be paid. With estimated quarterly tax, you’ll need to send in 25% of what you estimate to owe next tax season using Form 1040-ES. The four dates for filing these taxes are April 15, June 15, September 15 and January 15 of the next year.
In addition to income tax, any contracted employee given a 1099 must pay what’s called a self-employed tax. This tax is a Social Security and Medicare tax, which is normally taken out of a full-time employee’s salary when she receives a bi-weekly or bi-monthly paycheck.
Though it does typically take more work come tax time, one of the perks of being a 1099 independent contractor is the list of eligible deductions. It may at first seem as though your taxes are higher than some of your peers. At the end of the day, however, your deductions are designed to keep you at a similar, if not lower, rate than full-time employees. Some of the deductions include things like the electronics you use while contracted, transit fees(including repairs to your car), and even your home office. You can find a full list here.
Contracted employees also lose out on typical benefits afforded to salaried employees, like health insurance benefits or retirement plans. Don’t worry — these costs are also deductible. In fact, health insurance premiums and costs are usually fully deductible.
For more information on how to file as a contracted employee, it is always best to consult a tax professional or the IRS Tax Code. Looking for more information on how to become a contracted eDiscovery document reviewer? Visit our website now and sign up free of cost today!