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-   -   Independent Contractor, tax issues (https://britishexpats.com/forum/usa-57/independent-contractor-tax-issues-759638/)

Steerpike May 26th 2012 7:09 pm

Independent Contractor, tax issues
 
My partner was laid off earlier this year (programmer) but was lucky enough to be offered some work by a small group of folks who do software work. They pay her by the hour, and deduct nothing. I believe she is a '1099 independent contractor'.

Currently she is doing absolutely nothing about it - she gets a check in the mail (which has nothing withheld whatsoever), and drops it into the bank. No estimated payments to state/fed, no Social Security payments, no FICA payments, etc.

She's not doing a whole lot of work for them; I expect, by the end of the year, she'll earn about half of what she earned last year as a full-time employee (which is exactly what she wants - less work, more free time, but still enough to avoid using savings).

But I'm concerned about penalty situations - by not making any estimated payments to the state/fed, will she be penalized? How do you figure out what to do in terms of SS, FICA, income tax, etc?

Michael May 26th 2012 9:02 pm

Re: Independent Contractor, tax issues
 

Originally Posted by Steerpike (Post 10083619)
My partner was laid off earlier this year (programmer) but was lucky enough to be offered some work by a small group of folks who do software work. They pay her by the hour, and deduct nothing. I believe she is a '1099 independent contractor'.

Currently she is doing absolutely nothing about it - she gets a check in the mail (which has nothing withheld whatsoever), and drops it into the bank. No estimated payments to state/fed, no Social Security payments, no FICA payments, etc.

She's not doing a whole lot of work for them; I expect, by the end of the year, she'll earn about half of what she earned last year as a full-time employee (which is exactly what she wants - less work, more free time, but still enough to avoid using savings).

But I'm concerned about penalty situations - by not making any estimated payments to the state/fed, will she be penalized? How do you figure out what to do in terms of SS, FICA, income tax, etc?

She should make quarterly estimated payments for self employment tax (same as FICA but with employer contributions included minus business expenses such as millage (record miles) or gas and maintainance costs, supplies, etc.). Look up the latest self employment tax rate to determine the current percentage rate. As far as federal income tax, use the following calculator to determine probable annual income (subtract business expenses) and pay 1/4 of the tax amount as an estimated payment plus 1/4 of the self employment tax.

http://www.dinkytown.net/java/Tax1040.html
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

There are penalties if she doesn't file quarterly estimates. So have her put on her business hat and start thinking of things to deduct as a business expense. Capital equipment (computers, etc.) up to a certain amount can be deducted 100% in the year purchased. Whichever way she wishes to expense her car (millage or maintainance), she should have logs for work millage (about 55 cents per mile for deduction) or receipts for maintainance (gas, oil, repairs, etc) but can only deduct the percentage used for work (millage log should be kept). She may possibly be able to expense her commute to work miles but am not sure.

Bob May 26th 2012 9:35 pm

Re: Independent Contractor, tax issues
 
Definitely need to file quarterly estimates and claim back over paid taxes at end of year, but you don't want to be under paying them as the penalties can be heavy.

Thing to look out for would be claiming electricity/internet in a home office if the office isn't a dedicated office and not a dedicated for work utility bill.

Definitely claim any tech purchases for research reasons such as flash drives, hard drives, computers and books. I know a few folks who even claim games consoles and games but then they are in the games industry so not entirely taking the piss. Tax prep can also be claimed to an extent, so it might be worth getting for initially setting up your books.

Michael May 26th 2012 9:48 pm

Re: Independent Contractor, tax issues
 

Originally Posted by Bob (Post 10083846)
Definitely need to file quarterly estimates and claim back over paid taxes at end of year, but you don't want to be under paying them as the penalties can be heavy.

Thing to look out for would be claiming electricity/internet in a home office if the office isn't a dedicated office and not a dedicated for work utility bill.

Definitely claim any tech purchases for research reasons such as flash drives, hard drives, computers and books. I know a few folks who even claim games consoles and games but then they are in the games industry so not entirely taking the piss. Tax prep can also be claimed to an extent, so it might be worth getting for initially setting up your books.

She can be 10% under without penalties. If she didn't work the previous year, there probably wouldn't be any penalties since the law also waives penalities if your estimated payments are at least as much as the taxes you paid in the previous year.

Bob May 26th 2012 10:22 pm

Re: Independent Contractor, tax issues
 

Originally Posted by Michael (Post 10083869)
She can be 10% under without penalties. If she didn't work the previous year, there probably wouldn't be any penalties since the law also waives penalities if your estimated payments are at least as much as the taxes you paid in the previous year.

But if you were full time the previous year...

Michael May 26th 2012 10:47 pm

Re: Independent Contractor, tax issues
 

Originally Posted by Bob (Post 10083892)
But if you were full time the previous year...

As she was in this case, she then needs to pay estimated tax to not accrue penalties. But if someone has a large capital gains in any year, you really don't have to worry about paying estimated taxes if I understand the law correctly. But if you have very large capital gains two years in a row, you must pay estimated taxes on the second year to not accrue penalties.

Yorkieabroad May 27th 2012 2:27 am

Re: Independent Contractor, tax issues
 
How is she set up business wise - if she is incorporated (eg as an S corp) she will need to be filing quarterly 941's and an end of year 940 as well as making the tax deposits (frequency of the deposits will depend on the size of the payroll). These will show what her tax liabilites were and when they arose, hence when she should have been making the deposits. Its all pretty straightforward once you get it set up - just need to keep on top of the paperwork to make sure she doesn't miss any filing deadlines. Don't want to get on the wrong side of the IRS....!

Michael May 27th 2012 2:43 am

Re: Independent Contractor, tax issues
 

Originally Posted by Yorkieabroad (Post 10084077)
How is she set up business wise - if she is incorporated (eg as an S corp) she will need to be filing quarterly 941's and an end of year 940 as well as making the tax deposits (frequency of the deposits will depend on the size of the payroll). These will show what her tax liabilites were and when they arose, hence when she should have been making the deposits. Its all pretty straightforward once you get it set up - just need to keep on top of the paperwork to make sure she doesn't miss any filing deadlines. Don't want to get on the wrong side of the IRS....!

Many independent contractors (probably most when they are the only employee) don't set up a LLC or S Corp. It is not required but a LLC or S Corp can possibly have some benefits.

Yorkieabroad May 27th 2012 2:59 am

Re: Independent Contractor, tax issues
 
Possibly so - I just mentioned it as the OP said that his partner was a programmer, which is the line my wife is in. A lot of her clients insist on the contractors being incorporated, holding professional liability insurance, etc etc

Michael May 27th 2012 3:37 am

Re: Independent Contractor, tax issues
 

Originally Posted by Yorkieabroad (Post 10084104)
Possibly so - I just mentioned it as the OP said that his partner was a programmer, which is the line my wife is in. A lot of her clients insist on the contractors being incorporated, holding professional liability insurance, etc etc

While I was working for another company in the 1980's, my old boss was a manager at Intel and he asked me to do a project for him during the evenings. Several years later he was working for another company and asked me again to do another project during the evenings. Neither company asked me about being incorporated or having insurance. The Intel project was on site and the other project was at work at home with their equipment in my den.

Yorkieabroad May 27th 2012 3:52 am

Re: Independent Contractor, tax issues
 
I was just commenting on current day experience of involvement in an IT consultancy - I honestly couldn't comment on what was the norm 30+ years ago...maybe things have changed since then?

Or maybe its determined by the size of the contract, the industry its for, the specific company or whatever. My wife has needed it for around 75% of her clients in oil/power/gas since she first incorporated in 2004. Its actually quite a nice little boost to the earnings, as she charges considerably more for going corp to corp, and its clear that the companies she contracts to have a very limited grasp on the actual costs involved, and what very limited protection they are actually buying for that cost.

fatbrit May 27th 2012 4:14 am

Re: Independent Contractor, tax issues
 

Originally Posted by Steerpike (Post 10083619)
My partner was laid off earlier this year (programmer) but was lucky enough to be offered some work by a small group of folks who do software work. They pay her by the hour, and deduct nothing. I believe she is a '1099 independent contractor'.

Currently she is doing absolutely nothing about it - she gets a check in the mail (which has nothing withheld whatsoever), and drops it into the bank. No estimated payments to state/fed, no Social Security payments, no FICA payments, etc.

She's not doing a whole lot of work for them; I expect, by the end of the year, she'll earn about half of what she earned last year as a full-time employee (which is exactly what she wants - less work, more free time, but still enough to avoid using savings).

But I'm concerned about penalty situations - by not making any estimated payments to the state/fed, will she be penalized? How do you figure out what to do in terms of SS, FICA, income tax, etc?

It's no biggie not pre-paying the first year of self-employment -- the fine won't be that much at all -- hundreds rather than thousands if she's under 6 figure income. Just throw an estimated percentage from every payment into an account, and settle up in April next. The SS is in your federal tax bill.

If she expects to carry on self employed next year, probably should make quarterly payments of 4 lots of 1/4*90% of first year's tax bill.

Michael May 27th 2012 4:47 am

Re: Independent Contractor, tax issues
 

Originally Posted by Yorkieabroad (Post 10084145)
I was just commenting on current day experience of involvement in an IT consultancy - I honestly couldn't comment on what was the norm 30+ years ago...maybe things have changed since then?

Or maybe its determined by the size of the contract, the industry its for, the specific company or whatever. My wife has needed it for around 75% of her clients in oil/power/gas since she first incorporated in 2004. Its actually quite a nice little boost to the earnings, as she charges considerably more for going corp to corp, and its clear that the companies she contracts to have a very limited grasp on the actual costs involved, and what very limited protection they are actually buying for that cost.

Or there is also the possibility that Silicon Valley high tech companies work differently than oil/power/gas companies. Many things are done differently and seem to be a lot looser in the Silicon Valley.

Steerpike May 27th 2012 5:27 am

Re: Independent Contractor, tax issues
 

Originally Posted by Michael (Post 10083796)
She should make quarterly estimated payments for self employment tax (same as FICA but with employer contributions included minus business expenses such as millage (record miles) or gas and maintainance costs, supplies, etc.). Look up the latest self employment tax rate to determine the current percentage rate. As far as federal income tax, use the following calculator to determine probable annual income (subtract business expenses) and pay 1/4 of the tax amount as an estimated payment plus 1/4 of the self employment tax.

http://www.dinkytown.net/java/Tax1040.html
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

... .

Thanks for the info. So there are at least two independent 'contributors' to what you need to pay (self employment tax, income tax), but you pay it all through one payment to one body - the estimated tax payment? So she figures out what it is likely to be and pays it, and then at the end of the year, files actual paperwork and either pays more or gets a refund, just like a regular W2 employee? Repeat for State, of course ...


Originally Posted by Yorkieabroad (Post 10084145)
I was just commenting on current day experience of involvement in an IT consultancy - I honestly couldn't comment on what was the norm 30+ years ago...maybe things have changed since then?

Or maybe its determined by the size of the contract, the industry its for, the specific company or whatever. My wife has needed it for around 75% of her clients in oil/power/gas since she first incorporated in 2004. Its actually quite a nice little boost to the earnings, as she charges considerably more for going corp to corp, and its clear that the companies she contracts to have a very limited grasp on the actual costs involved, and what very limited protection they are actually buying for that cost.

I believe it's 'company policy' rather than any specific rule. The company I work for had about 5 employees when I joined. I hired my buddy as a contractor to do some IT work for me. That was back in 2006; we're now over 500 employees, and he's still working for me ... but any new contract has to be reviewed by 'legal' and they don't approve contracts with private individuals; perceived issues of risk, etc. So instead of paying a guy $85/hr to do something, we pay a consulting company $150-$200/hr for the same work :). Further - we require every employee / contractor to have a background check; if we contract with a 'corporation', we can put that obligation on them and just have them certify that their employees are checked out. This is in the 'Medical information' field - full of legal minefields ...

Chrisdc May 27th 2012 12:48 pm

Re: Independent Contractor, tax issues
 
The difference between Independent Contractor and Employee is complex and not entirely clear cut. If a company hires someone as an IC, and the government feels they really should have been hired as an employee (with tax witholding, social security tax etc) - then the company is at risk of severe financial penalties. It's become a big issue in recent years (at least in my industry.)

One of the questions asked to help define whether someone is really an independent contractor (and not an employee being paid incorrectly) is: "Are they a corporation."

Other indicators include - Do they control the hours and place of their work. Do they have a website, insurance etc..

Some employers are more conservative than others in how willing they are to hire independent contractors. It also varies a lot by industry.


Originally Posted by Michael (Post 10084196)
Or there is also the possibility that Silicon Valley high tech companies work differently than oil/power/gas companies. Many things are done differently and seem to be a lot looser in the Silicon Valley.



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