Once the U.S. economy started to head south a few years ago, many longtime employees were shocked to find themselves out of work (as corporations trimmed down or went entirely out-of-business). As a result, the work force environment began to completely transform in ways that weren’t immediately clear at the time. Many individuals that experienced unemployment or underemployed discovered that working for themselves, as an independent contractor, might be a way to sidestep a depressed job market.Development in Independent ContractorsTypically, the businesses which generate the most independent contractors tend to be realty (if you rent out a home you may well belong to this particular classification), along with farming. However, this has shifted a bit in the last 3 years. The Economic Modeling Specialist Inc. (ESMI) looked at data from the last decade and noticed that the frequency of 1099 rate payers increased in all but a couple states. While U.S. unemployment levels remain above average, it’s not clear that more people will consider opting for an independent contractor status if they can’t find other work. One reason for the growth in the self-employed is that companies can utilize contractors often more efficiently and effectively than regular employees, increasing their bottom line. In part, this is because businesses spend less on pay-roll taxation, healthcare, etc. for independent contractors.If a bad economy has pushed people into becoming self-employed, it’s reasonable to consider the possibility that these same people will become less eager to continue their 1099 status, in the event that the jobs climate shows improvement. This potential trend may also be supported by an upswing in legislation regulating how independent contractors are treated (the Employee Misclassification Prevention Act (EMPA) being just one example of this).Accidental Business OwnersWhat seems clear is that a share of the rise in 1099 taxpayers is caused by the lousy economic environment. For many, becoming self-employed appeared to be the best way they could supplement their living, and hopefully make as much as they had when they were traditionally employed. Needlessly to say, most of these people became independent contractors out of necessity. Because of this, some did not thoroughly comprehending the effects and repercussions caused by becoming an independent contractor.
Even though there are undoubtedly rewards related to actually being your own boss, many people don’t anticipate that it can make anything from submitting income taxes to purchasing insurance policies more complex, and more costly if you make mistakes. However, if the financial picture gets a little brighter, and more companies begin replenishing the staff they may have let go of two years ago, cautious independent contractors may seize the opportunity to slide into the labor force as an employee again.Benefits and Drawbacks of Independent ContractingWhether compelled to be an independent contractor because of terrible job opportunities, or because of life-long aspirations to be self-employed, lots of people understand the benefits of being their own boss. For starters, a lot of independent contractors ask for hirer rates, and due to the fact that contractors are less expensive to hire overall, corporations have a tendency to pay contractors much more that traditional employees who do the same job. Aside from the traditionally bigger pay, independent contractors usually have adaptable work hours, and can even work at home. In addition, independent contractors find that their dual roles (as both employer and employee) give them certain advantages when it comes to things like retirement. For example, independent contractors can place more income in an income tax delayed account, such as an SEP or individual 401(k), and may even manage to write off a number of expenditures against income taxes.However the down sides of becoming self-employed may be greater than the rewards. To begin with, businesses may dishonestly label people that should be employees as independent contractors, in order to save money, to the detriment of the independent contractor. Businesses do this in an effort to circumvent pay-roll taxation or to avoid paying for added benefits for folks who are basically employees. Additionally, most people who happen into an independent contractor status may not immediately understand the distinction between actually being an worker and becoming an independent contractor.For instance, independent contractors cannot get paid family vacation, sick leave, medical health insurance, worker’s compensation, or joblessness benefits-all of which they have to finance themselves. Beginners to independent contracting can be stunned to discover that they are not protected by an employer’s insurance, nor are they qualified to receive overtime; plus, they are required to shell out double the amount for Social Security and Medicare health insurance taxation (by paying self-employment tax). And while we’re talking about taxation, a few 1099ers don’t realize that they’re going to have to pay approximated income taxes to the Internal Revenue Service every quarter. They may not understand this until late charges and costs have been applied. Thus, it is obvious why self-employed status costs some people a lot more than they expected.How to Reap Benefits of Independent ContractingLuckily for us, the IRS provides details the income tax demands for 1099 taxpayers. One of the primary troubles for people who are self-employed is the self-employed income tax, in addition to the necessary regular income tax bills. A great way to navigate around these troubles is to send in a current W4 income tax document to the IRS. A W4 lets independent contractors figure out how much of their income should be taken out by an employer. It is relatively simple to direct extra income to be removed, and will ultimately be more beneficial than having to come up with money every quarter. Even though the money in each payroll check will be reduced, people will not have to pay regular estimations, and they’re not as likely to need to pay income tax at the conclusion of the entire year.
In addition, by effectively taking advantage of the perks of being self-employed, you will save even more on taxes. That is because independent contractors are allowed to contribute extra income to pension accounts (often much more than traditional employees can). One method to do that is with an Individual retirement account that is ideal for self-employed people. In particular, an SEP IRA (Simplified Employee Pension Individual Retirement Account) helps independent contractors that generate pre-tax deposits, reducing your income tax base. If the self-employed person starts an SEP IRA program, all workers should have the exact same benefits; for a good number of independent contractors, they’re their own boss and employee, so this works fine. The contribution cap is $49,000, and it is worked out at 20% of adjusted earnings.An additional advantage of being employed as an independent contractor is being in a position to write off specific organization-related expenditures (such as a home business office, or traveling costs) at the conclusion of the entire year. This may be complicated, and declaring specific breaks might bring Government auditors your way, consequently having an income tax specialist guide you is suggested.In the long run, for people who are caught in the surge of independent contractor status, you may be amazed at just how costly becoming self-employed can be. With the improving economy, and brand new job opportunities, now could be the moment for certain people among the ranks of the self-employed to go after long term occupations. Transitioning back to a traditional employee may provide specific advantages, that the intangible advantages of becoming self-employed just can’t beat.