Do 1099 Workers Get Pay Stubs? What to Use Instead
Understand why 1099 workers don't receive traditional pay stubs and what financial records they use instead for income tracking and tax preparation.
Distinguishing Between Employees and Independent Contractors
Traditional pay stubs are not issued to independent contractors, also known as 1099 workers. This difference stems from their classification and work relationship. Unlike employees, who have taxes withheld, independent contractors manage their own tax obligations, affecting the documentation they receive.
An employee (W-2 worker) has an employer responsible for withholding federal income, Social Security, and Medicare taxes from wages. The employer issues a Form W-2 at year-end summarizing earnings and withholdings. Pay stubs detail gross pay, deductions, and net pay for each pay period.
Conversely, an independent contractor operates as a self-employed individual, offering services to clients under a contractual agreement. Clients pay the independent contractor the full agreed-upon amount without deducting taxes. The Internal Revenue Service (IRS) considers factors like the payer’s control over the work, payment method, and who provides tools for classification.
What Independent Contractors Receive for Payment Records
Independent contractors rely on other documents to track income. A primary record is the invoice submitted to clients. This document details services provided, hours worked, agreed-upon rates, and the total amount due.
Upon payment, independent contractors receive direct deposit confirmations or bank statements reflecting incoming funds. These records prove payment received. While they show the gross amount deposited, they do not itemize tax withholdings, as none were made by the client.
Independent contractors also receive Form 1099-NEC, Nonemployee Compensation. Clients paying an independent contractor $600 or more for services in a calendar year are generally required to issue this form. It reports the total nonemployee compensation paid during the year and must be furnished to the contractor by January 31st of the following year. Form 1099-NEC is an informational return, reporting gross payments, not tax withholdings, unlike an employee’s pay stub.
Tracking Income and Expenses as an Independent Contractor
Independent contractors are responsible for tracking income and expenses for tax purposes. This record-keeping is essential for accurately calculating income tax and self-employment taxes. Failing to maintain organized records can lead to difficulties during tax preparation or an audit.
Independent contractors can use various methods to manage financial records. Many use spreadsheets to log incoming payments and outgoing business expenses, while others prefer accounting software. It is also helpful to keep digital or physical copies of invoices sent and payment confirmations.
Beyond income, tracking business expenses is important as these can often be deducted, reducing taxable income. This includes categorizing and retaining receipts for costs like office supplies, home office deductions, mileage, and professional development. Independent contractors are generally required to make estimated tax payments quarterly to cover tax liabilities.