You are here:

Tax Planning/Independent contactor tax

Advertisement


Question
Hello,

My daughter is thinking of taking a job where she would be paid as an independent contractor. She goes to college and lives at home age 20.

Will she need to do estimated tax or can she file once a year?

Answer
When things seem unusual it is good to ask questions. But there are more important questions that you need to have answered.

While some "jobs" are specifically designated as Independent Contractor, those are the exception.

What does taking the job and maintaining the Independent Contractor status instead of as an employee mean for your daughter?

1. She will have to pay ALL of the Social Security and Medicare on 100% of the money. How does this differ from being a wage employee? If she was an employee, the employer would pay 1/2 of Social Security and 1/2 of Medicare. Since SS and MEDI are 15.3% of her total gross payment that is a significant extra cost to your daughter.

2. No matter how long she works there, she will not be protected through Un-Employment, if she is let go for any reason, she has no safety net.

3. She will have to pay for her own Workers Compensation Insurance, probably can't even qualify for it, so she will operating unprotected if she is injured on the job.

4. She would not be eligible for retirement or healthcare benefits as a regular employee would since she is not an employee she doesn't get employee benefits.

What does this mean for a Business Owner, if the business can contract some or most of its employees independently?

Aside from saving 7.65% in Social Security and Medicare, and savings workers comp insurance costs and unemployment, and having the right to fire at will regardless the regulations that may exist to protect employees from that, and the savings from being able to selectively provide medical coverage and retirement benefits to only a small group of "employees" possibly just themselves.

They can offer what seems to be a bigger gross income knowing that the Independent Contractor will have a much larger outgo.

Most business owners that play the Independent contractor card don't even know about all of those concepts, some think it just saves them from some bookkeeping.

But it is not all rosy and good for the short sighted, misinformed, business owner that chooses this path.

IF, one of those independent Contractors doesn't pay their Social Security and Medicare #and I can assure you most don't since their didn't realize the responsibility and generally don't tent to have the money to pay it when they finally figure it out# The IRS can recharacterized that "Independent Contractor/1099" to a "Common Law Employee" and then the Business Owner would have to pay ALL the back taxes, Penalties, and Interest; probably wiping out the business.

What is the likelihood that the IRS will find out? How would they know that an IC hasn't paid their taxes? Well, the business owner fills out a 1099 to send to the IC and sends a copy to the IRS. That is a lead sheet. A list of potentials for the IRS to investigate. If they contact any of those IC/1099 that hasn't paid all the taxes that are due, they "Can", they don't have too, interview that IC and help them prove that they weren't completely independent. If they can show just one aspect of not being truly independent then they can be recharacterized and the IRS would pursue the Business Owner.

Short sighted and less than intelligent for any business owner to think that the 1099 Loophole is anything other than a hangman's noose.

Could someone game that system? get paid as an IC and then try to turn the table on the Business Owner in the end? That is a bigger gamble and a huge waste of effort. For what?

In reality would anyone what to invest their life even 6 months of it with a business owner that doesn't see the bigger picture?

I imagine your original question should matter much now. But. . .

She is required to file estimated taxes quarterly. She could use last years net taxable profit to estimate this years taxes. Since last year her profits were zero, she would have to make no actual payment until the end of the year.

Hope that helps.

Richard Fritzler

Tax Planning

All Answers


Answers by Expert:


Ask Experts

Volunteer


Richard Fritzler

Expertise

I am in the business of tax planning for business owners. Our company helps business owners structure so that they can be reduce the taxes that they owe, making them far more profitable.

Experience

Since 1986 I have been helping successful business owners reduce taxes, protect assets, and limit their liability. The company is Owelesstax, incorporated at www.owelesstax.com


Organizations
National Small Business Owners Association.
Nevada Association of Listed Resident Agents.
Citizens Legal Association
The Business Owners Institute

Publications
Contributing author to "The Corporate Standard Newsletter".
I am also a writer for an email newsletter about business
Googlegroups/Successfulbusiness
I am also an Expert in the areas of Tax Law, Retirement Planning, and Estate tax issues.

Education/Credentials
I have been in the business of assisting business owners in reducing their taxes and liability for over 17 years. Providing retirement option that are not just tax deferred, and not limited to a "token" tax free contribution. Retirement plans that allow for total and complete access before you are 59.5 with no penalties

©2016 About.com. All rights reserved.