1099 vs. Incorporated Independent Contractors


Independent Contractors are classified according to their tax status as either 1099 or incorporated.

Sole proprietorships file a schedule C with their income tax return and receive a 1099 form for all monies paid in excess of $600 by clients. The business expenses of a sole proprietorship are itemized on Schedule C, and filed with the personal annual income tax return. A sole proprietor can have a retirement account in the form of KEOGH or SEP-IRA.

An incorporated contractor files a personal income tax return and the corporation files a corporate income tax return. The contractor is a W-2 employee of the corporation. The business expenses are itemized on the corporate tax return. Corporations can create one of the following retirement accounts: 401(k) Plans or Pension Plans.

More information on the subject could be found at http://www.quicken.com/retirement/.

An incorporated contractor still has to meet the IRS's 20 questions. If the contractor cannot, then the IRS can assert that the corporation will not be recognized per section 1706 of TRA86. The IRS has not audited incorporated contractors with the same zeal as 1099 contractors as long as the corporation has paid all applicable taxes.

As part of our services to protect our clients from the Risk of Non-Compliance exposure, Chancellor & Chancellor will verify that a contractor is in compliance according to the guidelines delineated by the IRS. We will confirm that a contractor's corporation is in good standing with the IRS and that obligations to state and federal agencies are being met.

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