In today’s economy, people earn income in many different ways. Some work as employees, while others take on short-term projects or contract-based work. Depending on how the work relationship is set up, a person may be classified as an employee (W-2) or as an independent contractor (1099).
Both paths come with unique considerations around pay, taxes, and benefits. Here are four key things to understand about independent contracting and how it differs from traditional employment.
Independent contracting means providing services to a business or client under the terms of a contract agreement. The agreement generally outlines the type of work, how compensation is determined, and the duration of the engagement.
Unlike employees, contractors are not on a company’s payroll, and they typically receive payment per project, per shift, or per hour worked. Each engagement may vary in structure—some are short-term, others recurring.
For more information on managing your finances as a self-employed individual, check out 7 of the most common self-employment tax questions, answered.
For employees (not contractors), the employer automatically withholds federal and state taxes from each paycheck. At the end of the year, those details appear on a W-2 form.
As an independent contractor, things are a little different. Every business you do work for will pay you the full amount you earned, no taxes deducted. But you will likely have to pay estimated quarterly taxes based on the income you earn. (You can find more details about how that works here.)
But you'll still have to file annual taxes by April 15th each year to make sure you paid the right amount. There are some common tools for filing self-employment taxes, including:
As an independent contractor, you often have to spend money to keep your business running. Luckily, the IRS gives you a break on certain work-related expenses, like work supplies and health insurance. If you properly document these expenses, you'll get some tax money back from the government. Here's how:
Taxes can be a pain, but deductions can save you hundreds (or even thousands) of dollars a year. So don't skip out!
Employees often receive benefits such as health insurance, paid time off, and unemployment protection through their employer. Independent contractors generally do not, though similar coverage can sometimes be arranged individually.
Whether working as an employee or as an independent contractor, it’s essential to know how classification affects taxes, benefits, and legal responsibilities. Understanding these differences helps ensure you’re prepared for each opportunity.
For more resources on flexible work and professional growth, visit Instawork.com to explore available opportunities.
Disclaimer: The information provided in this article is for general educational purposes only and should not be considered legal, tax, or financial advice. Instawork does not provide tax advice or services. You should consult a qualified tax professional or accountant regarding your individual circumstances and obligations.
