FAQs

Yes, you do need to report the money you make from your side hustle, even if it's a small amount. The IRS requires you to report all income, whether it comes from a full-time job, part-time work, freelance gigs, or a side hustle.

We will help you to stay compliant with IRS regulations.

Pro:
As a business owner, if you incorporate, you may be able to set up a retirement plan (like a Solo 401(k) or SEP IRA) and contribute more to it than you would as a sole proprietor. You can also deduct your health insurance premiums if you're incorporated, which is a valuable benefit if you need to cover healthcare costs for yourself and your family.

Con:
These benefits are available to sole proprietors, too, but incorporating may provide additional options and flexibility for retirement planning and health benefits.

We will help you weigh your options and suggest a path forward for you.

The difference between a 1099 worker (independent contractor) and an employee is significant in terms of tax treatment, legal responsibilities, and the nature of the working relationship. Here’s a breakdown of the key differences:

1. Tax Withholding and Reporting

• 1099 Worker (Independent Contractor):

  • Tax Reporting: A 1099 worker is considered self-employed, so they are responsible for paying their own taxes. If you earn $600 or more from a single client, you will typically receive a 1099-NEC form from the business that paid you. This form reports how much you were paid during the year, but taxes are not withheld from your pay.
  • Self-Employment Tax: 1099 workers must pay both Social Security and Medicare taxes (self-employment tax), in addition to income tax, using Schedule SE when filing their taxes. These taxes are calculated on the net profit of the business.
  • No Benefits: Independent contractors are not eligible for employee benefits like health insurance, retirement plans, or paid time off. They must arrange and pay for these on their own.

• Employee:

  • Tax Reporting: Employees receive a W-2 form, which reports their total wages and the taxes withheld during the year. The employer withholds federal, state, and Social Security/Medicare taxes from each paycheck and sends these to the IRS.
  • Employer Contributions: Employers contribute to Social Security and Medicare taxes on behalf of their employees and often pay for benefits such as health insurance and retirement contributions.
  • Benefits: Employees may be eligible for benefits like health insurance, paid sick leave, vacation time, 401(k) matching, and other perks, depending on the employer.

2. Control and Independence

• 1099 Worker (Independent Contractor):

  • Control Over Work: Independent contractors generally have more control over their work. They can choose their own hours, work from multiple clients, and often have the ability to determine how the work is completed. The business hiring the contractor has less control over how, when, and where the work is done.
  • Flexibility: Independent contractors often have more flexibility in their jobs. They may work with multiple clients, set their own schedules, and choose the projects they want to take on.

• Employee:

  • Employer Control: Employees are generally under direct control of their employer, which means the employer can dictate what work needs to be done, how, when, and where it is performed. Employees typically work set hours and are expected to follow the company's policies and procedures.
  • Ongoing Relationship: Employees often have a more long-term, ongoing relationship with their employer, whereas 1099 workers may work on specific projects or temporary contracts.

3. Legal and Regulatory Protections

• 1099 Worker (Independent Contractor):

  • Less Protection: Independent contractors do not have the same legal protections as employees. For example, they are not entitled to protections under labor laws like minimum wage, overtime, or anti-discrimination laws. They are also not covered by workers' compensation (unless they obtain their own coverage) or unemployment insurance.
  • Business Expenses: Contractors can often deduct business-related expenses (like office supplies, equipment, and mileage) from their taxes to reduce taxable income. However, they must keep accurate records and file these deductions when they submit their tax return.

• Employee:

  • Worker Protections: Employees are entitled to various labor protections, including minimum wage, overtime pay (under the Fair Labor Standards Act), unemployment benefits, and workers' compensation in case of injury on the job. Employees are also protected by anti-discrimination laws.
  • Business Expenses: Employees cannot typically deduct business expenses the way independent contractors can. If an employee incurs expenses as part of their job (like traveling for work), the employer may reimburse them, but the employee cannot claim these expenses on their tax return.

4. Employment Relationship and Duration

• 1099 Worker (Independent Contractor):
  • Project-Based or Temporary: Contractors are usually hired for specific projects or for a temporary period. Once the work is completed, their relationship with the company may end. They are typically not considered part of the company’s permanent workforce.
  • Multiple Clients: Contractors often work for multiple clients at once and are not restricted to a single employer.
• Employee:
  • Ongoing Relationship: Employees usually have a more long-term, continuous relationship with the employer. They often work full-time or part-time and are part of the company's workforce.
  • Job Security: While employees have more stability in their role, they can be laid off or terminated. Their relationship with the employer is generally more formal, with set expectations, performance reviews, and career development opportunities.

5. Workplace Integration

• 1099 Worker (Independent Contractor):
  • Less Integrated into Company: Independent contractors are often external to the company and do not have the same integration into the workplace. They may work remotely or off-site, and typically do not attend company meetings, trainings, or team events.
• Employee:
  • Integrated into Company: Employees are generally more integrated into the company culture and structure. They often work closely with other employees, attend meetings, and may be part of a team. They may also be subject to company policies regarding conduct, attendance, dress code, and more.

6. Cost to Employer

• 1099 Worker (Independent Contractor):

  • Lower Cost to Employer: Employers typically pay 1099 workers only for the work completed, and there are no obligations for benefits or tax withholdings. Contractors are responsible for their own taxes, insurance, and retirement contributions. This makes 1099 workers a cost-effective option for short-term or project-based work.

• Employee:

  • Higher Cost to Employer: Employers are responsible for withholding taxes, providing benefits, and covering additional employment costs, such as Social Security contributions, workers' compensation, and other employee benefits. This makes employees a more expensive option for employers in terms of total compensation and overhead.

Summary of Key Differences:

When to Choose One Over the Other:

• Hire a 1099 Worker if you need someone for temporary work, specialized skills, or project-based tasks, and you want to avoid the cost and complexity of offering benefits or handling employment taxes.
• Hire an Employee if you need someone to be part of your regular workforce, with a more consistent schedule and work responsibility, and you're willing to offer benefits, withhold taxes, and handle employment obligations.

Note: The IRS has specific rules about what constitutes an employee vs. an independent contractor, and misclassifying a worker can lead to penalties. If you're unsure about how to classify someone, it’s a good idea to consult with an accountant or legal professional.