Tax Time: What’s an IT Contractor to Do?
April 15 is looming large for many IT professionals, perhaps none more so than IT contractors who will have to file a stack of separate 1099s for the multitude of companies they’ve done business with. This can be a frustrating process, because there’s a lot of work involved with filing that many forms, and more importantly, 1099s are seven times more likely than a W-2 to be audited by the IRS, said Gene Zaino, president and CEO of MyBizOffice Inc.
According to Zaino, there are essentially three tax categories for individual IT contractors:
- Sole proprietors: Individuals who conduct business on their own and file a 1099 for each company they work with.
- Members of S corporations or limited liability corporations/partnerships: The former is an umbrella corporation of smaller organizations, which allows for simpler individual tax filings and record-keeping. The latter, while different in a business sense, is nearly identical in terms of taxation.
- Journeymen: Individuals who work for organizations that send them from place to place, much like a staffing company.
MyBizOffice, an employment and financial services provider, offers IT professionals a “fourth way” to approach their tax filing, Zaino said. “We’re not a staffing firm. We’re yet another category, what we call ‘portable employment.’ What we do is if they’re an independent contractor, we would tell to join MyBizOffice and we would actually set them up as a separate business entity—we call it a business center—with MyBizOffice. Think of it as creating a subsidiary within our company. We basically put them in business. They get to leverage all of the buying power we have in terms of group health benefits and retirement programs, and they get to access the contracts we have in place right now with about 700 organizations. They could actually ride those contracts and work for those companies. But they need to find work on their own. We do not get involved in setting fees or brokering their services. What we provide for these individuals is basically a back-office employment service. We become their employer, and they get a W-2 from us so they don’t have to deal with big tax prep issues.”
Another unique feature of MyBizOffice’s services for independent contractors is the method the company uses for handling business expenses, including training and certification costs, Zaino said. “As they incur expenses while doing their business, they can send us those expenses they apply to their business center,” he said. “We allow them to process those expenses through us, and they get that back on a pre-tax basis. They don’t have to wait until the end of the year to put that on their tax return. They get the tax advantages as if they were in their own Schedule C, sole proprietorship, but they get the convenience of us basically handling those processes for them, and they only get a W-2 at the end of the year of whatever those taxable wages are. Their taxable wages are reduced by the amount of pre-taxed money they get back on expenses that we reimbursed them for.”
Regardless of whether IT contractors choose to go through MyBizOffice or a staffing firm or corporation, Zaino discourages them from taking the sole proprietorship route. “Generally, companies do not want to deal with individuals directly for administrative problems and, primarily, IRS risk,” he said. “The IRS basically puts a burden on the paying company. If they believe that the individuals could be classified as employees, the company gets a huge penalty of more than double the retroactive payroll taxes. You’ll find most large companies will not pay anybody under a 1099. They’ll force them to go through some kind of corporation, whether it’s their own corporation, a staffing company or a company like ours that provides employment services for these people.”
For more information, see http://www.mybizoffice.com.