Tax Talk for 1099 Attorneys
The following blog entry and comments are not to be taken as legal or tax advice. Always consult the IRS tax code, a tax attorney, or other professional. From the calendar and our search traffic, we know what season it is: Tax Time. Common searches driving traffic to Hire an Esquire, specifically the section of our TOS discussing the independent contractor status of attorneys retained through Hire an Esquire, seem to indicate that:
An attorney thought he/she was an employee but received a 1099 form instead of a W-2 at tax time.
An attorney working as an independent contractor is trying to figure out their tax responsibilities.
So, we're giving a general overview of what tax time looks like for attorneys working as independent contractors.
How does being an independent contractor versus an employee change the way I file my taxes?
An independent contractor receives a 1099 form from people whom they have done work for over the past tax year and is considered self-employed.
Unlike in a typical job where an employer withholds taxes to the federal government and issues a W-2 to the employee at the end of the year, an independent contractor is simply paid as a consultant or vendor and is responsible for paying taxes normally withheld and remitted to the government by their employer as well as self-employment tax. There may also be additional taxes at the state and local level.
Depending upon income, an independent contractor may also have to file their taxes quarterly.
The tax code is much more generous with deductions for independent contractors than for employees.
The IRS Self-Employed Tax Center is a good resource for what you have to do at tax time and throughout the year if self-employed. However, locating a great accountant or tax preparer familiar with small businesses and your local tax requirements to walk you through things your first year as an independent contractor can be worth every penny and more.
What are the other financial implications of being a 1099 independent contractor?
In addition to withholding money that you receive and filing your own taxes as stated above you are:
Ineligible for unemployment.
But, eligible for a variety of deductions that you likely aren’t entitled to as an employee.
This sounds like a lot of work, why would I want to be an independent contractor?
Don't let the tax code, additional filing and generalized Kafkaesque anxiety that the IRS instinctively inspires in Americans scare you away from being a freelance attorney! After you get past the initial tax headache (once again, a good tax professional can ensure that this headache is short and dull and doesn’t turn into a migraine) there are many benefits.
MORE DEDUCTIONS: The self-employed are often eligible for many deductions which can make their tax burden the same or less as an employee. Some examples of common deductions that the self-employed are commonly eligible for that are generally unattainable for employees:
Health Insurance: If you’ve been a contract attorney through an agency you’ve probably noticed that their health plans are expensive and cover little. These are generally group plans that your “employer” doesn’t subsidize at all. You often have to get your own health insurance outside of your “employer” if you want more than co-insurance with a low yearly maximum. As a self-employed individual, your health insurance costs and premiums are usually fully deductible.
Transit: driving and paying for parking or taking the subway/train to work is a significant cost for many, all or a portion of these costs may be tax deductible when you are self-employed.
Electronics and Related Fees: Your iPhone, phone bill, computer and Internet that you use for business purposes can be partially or entirely deductible depending upon their ratio of personal to business use.
Higher Hourly Rates: For example, hourly rates for contract attorneys employed through a temp agency around the East Coast corridor are in the neighborhood of $20-$30/hr. Rates for attorneys doing freelance and per diem work are generally $45+/hr. depending upon the level of specialty required. In addition to quickly making up for the additional taxes (if any) that you pay as a freelance attorney versus an attorney-employee, the difference in pay can often quickly surpass your total unemployment benefits for the year.
Freedom: As a freelance attorney, you decide which projects to take and how to organize your time. Sadly, many attorneys working as firm employees have little control over their time. Their evening, weekends, vacations and lives in general are too often subject to a partner’s whim. Extra work often doesn’t correlate to extra pay. The price you pay for a partner not being able to dump a pile of work on your desk at 5PM on Friday, and request 30 hours worth of work by Monday morning, may be a bit more tax hassle and more work finding your own clients. If you do choose to take on a panicked client who needs 30 hours worth of work over a weekend, as a freelancer you can charge accordingly instead of hoping that the partners will remember this when it’s time for bonuses or layoffs.
Have you been working as an attorney independent contractor? Please share your perspective on being a freelance attorney at tax time in the comments section. Please remember that Hire an Esquire does not endorse nor verify the accuracy of anything said in the comments section. Please do not use or construe these comments as tax or legal advice.