A 1099 contractor is also known as an independent contractor. This is a designation in the USA, and the number 1099 refers to the form filed by each employer, changing the way taxes are considered. The contractor, even if he or she works full time, is not considered an employee, and as such, does not have taxes removed from pay. This makes a significant difference in how these workers pay taxes each year, provided they are residents or citizens.

Since taxes aren’t being removed, federal and state taxes are not taken out. The 1099 contractor will have to pay these out of the pay he or she receives. Some people do this by making quarterly estimated payments, so that they do not get hit with huge tax liabilities at the end of the year. Another option is to figure out taxes and deposit the money in a savings account, which might earn a little interest. One potential way to reduce some of the taxes owed is by maintaining something like a home office, provided that makes sense given job context. Doing this, though, means many more forms to file at the end of each year.

It is also important to note that the 1099 contractor is not just likely to pay federal and state taxes. They must also pay taxes that go to fund eligibility for Social Security retirement and Medicare. Depending on amount made, these can be pricey and they can certainly reduce amount of available income. Those who make a considerable amount via one or more 1099 contractor positions, really are usually best served when they file quarterly taxes, especially if they think they might not be able to resist using the money set aside for taxes.

There are sometimes difficulties when trying to fill out a joint return when one person is a 1099 contractor. Any money overpaid in taxes by the person who works as a regular employee may need to be applied to the money owed by the freelancer. Some couples have actually worked this to their advantage. The regular employee drops his/her deductions so that a larger amount of tax is withheld than would normally be correct. The overpayment is then applied to the freelancer’s tax obligations.

Interestingly, though it’s important to consider what the 1099 contractor may owe, it’s equally valuable to think about what they don’t owe. Contractors don’t pay unemployment taxes. At first, this may seem like a terrific thing, but the contractor cannot collect unemployment, and given the nature of their employment, they can pretty much be fired at any time. Even though they don’t possess this tax obligation, they lose a valuable protection that might really count if they lost work.