Paying taxes as an independent contractor/ 1099

[skeedo]

Getting a new job and they're paying employees via 1099 for the time being. From what I'm reading about paying taxes being an independent contractor, you have to pay the normal tax (I'll be in 25% bracket) and also a 15% self employment tax. This means I'll be paying 40% of my income to taxes, this can't be right is it?! Granted I'll have a lot of deductions, I still don't seeing it equaling out compared to paying taxes the standard way with W2s. For instance, 40% tax on a $40k salary is $16,000. Normally have about 30% tax being paid through W2s, which would be $12,000 tax. That means I'd have to come up with $10,000 in deductions to even it out.

Furthermore, why would I have to pay self employment tax when I'm not self employed? I'm working for the employer, I receive benefits through the employer. Other than working from home, I'm actually in no way independent, they just choose this method of paying me.

If anyone reading this is currently/ formerly paid via 1099 please help me shed some light on this!

 

[highland145]

They're saving the SS/medi by having you pay all of it.

SS 6.2% for you and the employer. Medi 2.9% for you and the employer. But you get to pay both under the 1099. They could be skirting the tax code by making you a 1099 because you work at home. The rules are prety specific, iirc.

Sounds strange to be a 1099 and get benefits too.

Calling CPA, EagleKeeper.

Don't forget your state tax too.

 

[Brainonska511]

They're saving the SS/medi by having you pay all of it.

SS 6.2% for you and the employer. Medi 2.9% for you and the employer. But you get to pay both under the 1099. They could be skirting the tax code by making you a 1099 because you work at home. The rules are prety specific, iirc.

Sounds strange to be a 1099 and get benefits too.

Calling CPA, EagleKeeper.

Don't forget your state tax too.

You might also want to have a look at this:
http://www.irs.gov/Businesses/Small...ndent-Contractor-(Self-Employed)-or-Employee?

 

[Wreckem]

I am not going to get into whether they are skirting tax law or not.

However, self employment tax is as follows.

Normally, as an employee, the employer pays half of SS/Medicare, with independent contractors they don't, so for 2013, an independent contractor pays the full 15.3% themselves, instead of half that amount.

Because you pay the full amount, you get an above the line tax deduction equal to 1/2 of the self employment tax. So if your self employment tax is $8000, you get to deduct $4000.

Also the total taxes paid by an independent contractor on $40k would be $6210 in self employment taxes and ~$3600 in income, or slightly less than $10k. Not $16000. If a normal employee makes $40k, his taxes would be ~$7103.

 

[BoomerD]

They're saving the SS/medi by having you pay all of it.

SS 6.2% for you and the employer. Medi 2.9% for you and the employer. But you get to pay both under the 1099. They could be skirting the tax code by making you a 1099 because you work at home. The rules are prety specific, iirc.

Sounds strange to be a 1099 and get benefits too.

Calling CPA, EagleKeeper.

Don't forget your state tax too.

Plus, in addition to the other payroll taxes mentioned, they're avoiding work comp tax and unemployment taxes.
If the employer directs the scope of work, odds are, he's an employee, not a contractor. VERY suspicious.

Brainonska's link provides the necessary information to determine actual employment status...but even with that, many companies still try to cheat the system.

 

[CPA]

If the employer directs the scope of work, odds are, he's an employee, not a contractor. VERY suspicious.

Brainonska's link provides the necessary information to determine actual employment status...but even with that, many companies still try to cheat the system.

This. Plus, if you are receiving benefits from them, that is even more of an indication that there is an employer/employee relationship.

Hate to say this, but you may a fight on your hands and may need to get the IRS involved. You can submit SS8 and ask for an IRS determination. If they determine you are an employee, then you can file Form 8919 to report uncollected Social Security taxes by the employer.

 

[Markbnj]

I am not going to get into whether they are skirting tax law or not.

I don't know about "skirting tax law" because I'm not a lawyer, but having run a business I can say that they are definitely setting themselves up for trouble. The IRS likes employees, doesn't like contractors, and especially doesn't like businesses that use contractors like employees because it's easier and cheaper.

 

[mkrohn]

There's nothing wrong with it, you get enough tax benefits to make it worth it. Talk to an accountant and setup proper writeoffs. It ends up being more work through the year but if you do it consistantly you can really end up in better shape.

 

[EagleKeeper]

What the employer is doing is illegal.

However, if you have the ability to take advantage of such by utilizing the write offs; do so.

Keep very accurate records of all direct and indirect expenses. Clues are in the tax thread
You can filter them out later.

 

[skeedo]

There's nothing wrong with it, you get enough tax benefits to make it worth it. Talk to an accountant and setup proper writeoffs. It ends up being more work through the year but if you do it consistantly you can really end up in better shape.

Well that's good to hear. I think I will definitely get in touch with an accountant/ tax professional about this.

I'm definitely not going to be reporting/ fighting my new employer if what they have going is illegal because the CEO is a friend of mine, but it will be good to inform him of the legality issues.

 

[jayzds]

Well that's good to hear. I think I will definitely get in touch with an accountant/ tax professional about this.

I'm definitely not going to be reporting/ fighting my new employer if what they have going is illegal because the CEO is a friend of mine, but it will be good to inform him of the legality issues.

It would be smart to let them know and fix the issue before they get audited and/or hammered. I have seen similar issues and they will most likely lose unless they can prove otherwise. Check into common law rules Revenue Ruling 87-41. Also IRS training materials course 3320-102, independent contractor or employee? which us under the IRS website.

 

[Fern]

Well that's good to hear. I think I will definitely get in touch with an accountant/ tax professional about this.

I'm definitely not going to be reporting/ fighting my new employer if what they have going is illegal because the CEO is a friend of mine, but it will be good to inform him of the legality issues.

Yeah, and he should have discussed this with his (tax) accountant.

It has been my experience that treating people as independent contractors when it is proper to treat them as employees will eventually be found out.

Every time someone is fired or laid off he has risk. Often these people will go to the (state) unemployment office and try to claim unemployment benefits. The state unemployment office will then contact him and investigate etc.

When someone finds they owe a bunch of income tax (I'm including S.E. tax as it is calculated and paid with regular income tax) they often try to get out of it by claiming they shouldn't have to pay 100% of the S.E. tax etc. Some will lie and claim they did withholding etc. I.e., the IRS will then contact him. (The IRS can demand he pay the 1/2 of S.E. taxes, plus interest and penalty. In some cases they could make his company pay the person's regular income tax, or at least up to the amount that should have been withheld.)

I cannot tell from your post if you should be treated as an employee or a contractor, but am suggesting the CEO give it some serious consideration because there is a decent chance the issue will come up with the authorities, and if so, he wants to be correct in his treatment.

Oh, and if you're a contractor the benefits should likely be reported to on Form 1099 as well. I.e., you will be paying income and S.E. taxes on them. Many benefits are not taxable to employees, but that is ONLY for employees, not contractors.

Fern

 

[highland145]

Oh, and if you're a contractor the benefits should likely be reported to on Form 1099 as well. I.e., you will be paying income and S.E. taxes on them. Many benefits are not taxable to employees, but that is ONLY for employees, not contractors.

 

[skeedo]

Welp, I'm digging up this year old thread for a couple of reasons. First I've received such great life advice from this forum I figure I might as well. Secondly, things are kind of going sour at my new job after a year of being here and hoping I can receive some more advice on the matter.

After about 6 months on the job, I was finally able to get paid through W2s instead of 1099. Thing is, I have a feeling that they may have secretly put me back on 1099s and claiming to be paying me via W2. Why? The founder seems to think if he's paying people by 1099, they're not eligible for unemployment (which is of course not true in this case as I am an employee of the company). He claims my performance hasn't been good lately, and I have not been feeling respected as an employee so I think my days are numbered here.

Here's the reason I think I'm back on 1099s. First off, he claims that there's a problem with the accounting software and has just decided to pay me a flat rate every paycheck and that he'll 'eventually get things evened out'. My paychecks equate to 100 hours of work if proper taxes are taken out. If they are not taken out and I'm being paid via 1099, the paycheck equates to 80 hours of work. Bi-weekly paychecks normally have anywhere from 80 to 100 hours depending on how many days in the month and the dates on which weekdays fall. I really don't see him paying me an extra 20 hours on some paychecks just because he can't figure out the accounting software.

I do not normally receive pay stubs which makes this more of a conundrum, however a month ago I needed pay stubs to apply for an apartment rental application. It took him a few days to get me the stubs, and the gross payment for each of the three paychecks were off by about $12 from what was deposited in my bank account. Since they did not match the actual deposits this further leaves me to believe that I am not being paid via W2 and he spent some time finagling with the accounting software to get the bogus W2 to match payment as close as possible to what I was actually paid.

My question is, is there some way I can find out if I'm actually being paid by W2 or 1099, or is this data not reported to the IRS until the end of the year? If I'm getting paid via 1099, not only will I end up owing a boatload in taxes, but I'm also not getting paid for all the hours that I have worked.

Any advice will be really appreciated.

 

[DaveSimmons]

Does the IRS pay bounties for turning in tax cheats like your boss "allegedly" might be? If so, collect that as part of your severance package

 

[Slew Foot]

Welp, I'm digging up this year old thread for a couple of reasons. First I've received such great life advice from this forum I figure I might as well. Secondly, things are kind of going sour at my new job after a year of being here and hoping I can receive some more advice on the matter.

After about 6 months on the job, I was finally able to get paid through W2s instead of 1099. Thing is, I have a feeling that they may have secretly put me back on 1099s and claiming to be paying me via W2. Why? The founder seems to think if he's paying people by 1099, they're not eligible for unemployment (which is of course not true in this case as I am an employee of the company). He claims my performance hasn't been good lately, and I have not been feeling respected as an employee so I think my days are numbered here.

Here's the reason I think I'm back on 1099s. First off, he claims that there's a problem with the accounting software and has just decided to pay me a flat rate every paycheck and that he'll 'eventually get things evened out'. My paychecks equate to 100 hours of work if proper taxes are taken out. If they are not taken out and I'm being paid via 1099, the paycheck equates to 80 hours of work. Bi-weekly paychecks normally have anywhere from 80 to 100 hours depending on how many days in the month and the dates on which weekdays fall. I really don't see him paying me an extra 20 hours on some paychecks just because he can't figure out the accounting software.

I do not normally receive pay stubs which makes this more of a conundrum, however a month ago I needed pay stubs to apply for an apartment rental application. It took him a few days to get me the stubs, and the gross payment for each of the three paychecks were off by about $12 from what was deposited in my bank account. Since they did not match the actual deposits this further leaves me to believe that I am not being paid via W2 and he spent some time finagling with the accounting software to get the bogus W2 to match payment as close as possible to what I was actually paid.

My question is, is there some way I can find out if I'm actually being paid by W2 or 1099, or is this data not reported to the IRS until the end of the year? If I'm getting paid via 1099, not only will I end up owing a boatload in taxes, but I'm also not getting paid for all the hours that I have worked.

Any advice will be really appreciated.

Are there taxes being withheld from your paycheck? If so = w2, if not 1099.

 

[RandomWords]

didn't see this was an old post...

Are there taxes being withheld from your paycheck? If so = w2, if not 1099.

This would be a good indicator.

You can use form 8919 at the end of the year if you are inappropriately classified.

I don't know if filling out an SS-8 would help you... but you might consider it if your employer is trying to debate whether you are an employee and get official notification that you are.

From the IRS:
Consequences of Treating an Employee as an Independent Contractor

If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.

 

[JulesMaximus]

Welp, I'm digging up this year old thread for a couple of reasons. First I've received such great life advice from this forum I figure I might as well. Secondly, things are kind of going sour at my new job after a year of being here and hoping I can receive some more advice on the matter.

After about 6 months on the job, I was finally able to get paid through W2s instead of 1099. Thing is, I have a feeling that they may have secretly put me back on 1099s and claiming to be paying me via W2. Why? The founder seems to think if he's paying people by 1099, they're not eligible for unemployment (which is of course not true in this case as I am an employee of the company). He claims my performance hasn't been good lately, and I have not been feeling respected as an employee so I think my days are numbered here.

Here's the reason I think I'm back on 1099s. First off, he claims that there's a problem with the accounting software and has just decided to pay me a flat rate every paycheck and that he'll 'eventually get things evened out'. My paychecks equate to 100 hours of work if proper taxes are taken out. If they are not taken out and I'm being paid via 1099, the paycheck equates to 80 hours of work. Bi-weekly paychecks normally have anywhere from 80 to 100 hours depending on how many days in the month and the dates on which weekdays fall. I really don't see him paying me an extra 20 hours on some paychecks just because he can't figure out the accounting software.

I do not normally receive pay stubs which makes this more of a conundrum, however a month ago I needed pay stubs to apply for an apartment rental application. It took him a few days to get me the stubs, and the gross payment for each of the three paychecks were off by about $12 from what was deposited in my bank account. Since they did not match the actual deposits this further leaves me to believe that I am not being paid via W2 and he spent some time finagling with the accounting software to get the bogus W2 to match payment as close as possible to what I was actually paid.

My question is, is there some way I can find out if I'm actually being paid by W2 or 1099, or is this data not reported to the IRS until the end of the year? If I'm getting paid via 1099, not only will I end up owing a boatload in taxes, but I'm also not getting paid for all the hours that I have worked.

Any advice will be really appreciated.

Contact your state EDD (Employment Development Department). I'm sure they would be very interested in what your employer is doing and they will certainly be able to tell you if it is legal or not.

 

[skeedo]

Are there taxes being withheld from your paycheck? If so = w2, if not 1099.

Well, like I said I don't get paystubs regularly, I have to hound my boss for them. Last time I got them they said that taxes were taken out. The money is just wired to my bank account every two weeks so that's pretty much all I see. Today I got paid and it was my pay rate * 80 hours on the dot, same as it would have been when I was on 1099. He didn't even bother throwing a few dollars and change in there to make it look like there were some taxes taken out.

Contact your state EDD (Employment Development Department). I'm sure they would be very interested in what your employer is doing and they will certainly be able to tell you if it is legal or not.

I guess my best option is to contact the state Dept of Labor on the matter. I've read over the IRS code 3509 and it seems that my employer will be liable for my taxes, although I'm still getting mega screwed on wages if I'm only getting paid 80 hours per paycheck.