Taxation: Independent Contractors FAQs

Internal Revenue Service
  • What is the difference between a Form W-2 and a Form 1099-MISC ?

  • How do you determine if a person is an employee or an independent contractor ?

  • I received a Form 1099-MISC instead of a Form W-2 . I'm not self-employed, I do not have a business. How do I report this income?

  • I am self-employed. How do I report my income and how do I pay Medicare and social security taxes ?

  • What, if any, quarterly forms must I file to report income as an independent contractor?

  • I made several thousand dollars moonlighting as an independent contractor . What taxes do I need to pay?

    Q: What is the difference between a Form W-2 and a Form 1099-MISC?

    A: Both of these forms are called "information returns." The Form W-2 is used by employers to report wages, tips and other compensation paid to an employee. The form also reports the employee's income tax, Social Security taxes withheld and any advanced earned income credit payments. The Form W-2 is provided by the employer to the employee and the Social Security Administration.

    A Form 1099-MISC is used by a person or business to report payments made to another person or business who is not an employee. The form is required when payments of $10 or more in gross royalties or $600 or more in rents or services are paid. The form is provided by the payor to the IRS and the person or business receiving the payment.

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    Q: How do you determine if a person is an employee or an independent contractor?

    A: The determination is complex, but is essentially made by examining the right to control how, when and where you perform services. It isn't based on how you're paid, how often you are paid or whether you work part-time or full-time. There is no statutory definition of what an employee is, but there are three basic things to look at:
    • Behavioral control
    • Financial control
    • Type of relationship

    You can ask the IRS to make a determination as to whether an employer-employee relationship exists by filing Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

    If the IRS finds that an employer incorrectly treated an employee as a nonemployee, the employer will be liable for the social security and Medicare tax withholding that he or she failed to withhold and pay. (There are some exceptions to this, noted in Publication 15-A, Employer's Supplemental Tax Guide.)

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    Q: I received a Form 1099-MISC instead of a Form W-2. I'm not self-employed and don't have a business. How do I report this income?

    A: If payment for services you provided is listed in box 7 of Form 1099-MISC, you are being treated as a self-employed worker, also referred to as an independent contractor. You do not necessarily have to "have a business," but simply perform services as a nonemployee to have your compensation treated this way. The payer has determined that an employer-employee relationship doesn't exist in your case. That determination is complex, but is essentially made by examining the right to control how, when and where you perform those services. It is not based on how you are paid, how often you are paid or whether you work part-time or full-time. There is no statutory definition of what an employee is, but there are three basic things to look at:
    • Behavioral control
    • Financial control
    • Type of relationship

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    Q: I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?

    A: You are a sole proprietor if you're the sole owner of a business that isn't a corporation. Report your income and expenses from your sole proprietorship on Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship), or on Form 1040, SCHEDULE C-EZ, Net Profit from Business.

    If the total of your net profit from all businesses is $400 or more, you must pay into the Social Security System by filing Form 1040, SCHEDULE SE, Self-Employment Tax. For more information on this, refer to Publication 533, Self-Employment Tax.

    The federal tax system is based on a pay-as-you-go plan. Tax is generally withheld from your wages or salary before you get it. However, tax is generally not withheld from self-employment income. So you may be required to pay estimated tax. Publication 505, Tax Withholding and Estimated Tax, provides information on making estimated tax payments.

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    Q: What, if any, quarterly forms must I file to report income as an independent contractor?

    A: There are no quarterly income reporting requirements for federal income tax purposes. However, because you will have no withholding taken from your income, you may need to make quarterly estimated tax payments. You use Form 1040-ES, Estimated Tax for Individuals.

    You need to be aware that there may be state and local quarterly reporting requirements. You may want to go to your state's individual Web site for additional information.

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    Q: I made several thousand dollars moonlighting as an independent contractor. What taxes do I need to pay?

    A: You're responsible for Federal income tax and self-employment taxes on your income as an independent contractor. Self-employment taxes are your contributions to social security and Medicare. Your self-employment income and expenses will be reported on Form 1040, SCHEDULE C, Profit or Loss from Business, or you may qualify to use Form 1040, SCHEDULE C-EZ, Net Profit from Business. You will also need to use Form 1040, SCHEDULE SE, Self-Employment Tax, to compute and report your social security and Medicare tax, if you had net earnings from self-employment of $400 or more. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040-ES, Estimated Tax for Individuals.

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    Information courtesy of the Internal Revenue Service.
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