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Withholding tax = $0, how much should I pay?

Withholding tax = $0, how much should I pay?

Old Aug 27th 2010, 9:04 pm
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Default Withholding tax = $0, how much should I pay?

I'm a UK resident and passport holder, first job in the USA, working as an engineering contractor, earning good money. BUT... my employer is not withholding any tax. Stories go around the office saying that you should figure out how much withholding tax to pay yourself, and pay it Quarterly or be in big trouble with the IRS. I'm single with no dependents.

Does anyone have any advice or experiences they can share?

I've tried searching the IRS sites, can't find anything about this, is it an unusual situation?

cheers

Last edited by paulw99; Aug 27th 2010 at 9:53 pm.
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Old Aug 27th 2010, 9:21 pm
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Default Re: Withholding tax = $0, how much should I pay?

here you go......

http://tinyurl.com/2u4pwer
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Old Aug 27th 2010, 9:27 pm
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Default Re: Withholding tax = $0, how much should I pay?

now with less sarcasm.

http://www.moneychimp.com/features/tax_brackets.htm
This is a good web site, rememer that you need to pat both federal and state income tax - each state has it's own rules.

You'll produce your tax return between 1st Feb - 15th April next year, and need to pay all your tax by 15th April to avoid getting interest charges etc.

If you want to start paying your tax now...
Fill in this form and give it to your employer to start having tax withheld.
http://www.irs.ustreas.gov/pub/irs-pdf/fw4.pdf
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Old Aug 27th 2010, 9:52 pm
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Default Re: Withholding tax = $0, how much should I pay?

Thanks, but the employer doesn't want to handle the tax, says it's up to the contractors. Calculating the amount isn't the problem, it's more about whether the IRS gets shirty if you wait too long. Supposedly if you earn above x then you should get your withholding tax in quarterly, if it's above y then monthly. But I can't find anything about it on the web (yes, I do know how to Google!)
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Old Aug 27th 2010, 10:07 pm
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Default Re: Withholding tax = $0, how much should I pay?

I work in a CPA office, but there's only one guy who's here this afternoon to ask and he's busy right now.

I'' try and find out for you. you could always phone the IRS...
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Old Aug 27th 2010, 10:09 pm
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Default Re: Withholding tax = $0, how much should I pay?

Originally Posted by paulw99 View Post
Thanks, but the employer doesn't want to handle the tax, says it's up to the contractors. Calculating the amount isn't the problem, it's more about whether the IRS gets shirty if you wait too long. Supposedly if you earn above x then you should get your withholding tax in quarterly, if it's above y then monthly. But I can't find anything about it on the web (yes, I do know how to Google!)
OK - the employer wants to treat you as a self-employed contractor which makes you responsible for making estimated tax payments, social security payments, medicare payments etc and gets the employer completely off the hook.

This may or may not be legitimate.

There are lots of cases of employers who try to do this for people who really should be treated as employees precisely because it means that the employer doesn't have to pay any taxes or provide any benefits for the person in question.

The employer can get into big trouble if they do this when they should have been treating you as an employee.

Similarly you can get into big trouble if you really are an independent contractor and don't pay all of the employment related taxes (not just income tax) that you are supposed to.

As far as the income tax part of it goes, if you aren't paying anything by withholding then you definitely need to be making quarterly estimated tax payments to the IRS and (probably) your state.

... but you also need to worry about medicare and social security taxes ...

Last edited by md95065; Aug 27th 2010 at 10:12 pm.
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Old Aug 27th 2010, 10:14 pm
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Default Re: Withholding tax = $0, how much should I pay?

If you're self-employed, then you could read up on "Schedule C" and "Estimated Taxes".

Two things come to mind:
1. Just like HMRC, the IRS are sensitive to the distinction of "independent contractor" versus "employee" - you're not necessarily free to decide that you're one or the other.
2. Depending on your immigration status, you could be on shaky ground. For example, on an H-1B visa, you are expected to be an employee. There have been attempts to get round this with what are basically front companies to make independent contractors appear like employees during the H-1B application process, but there's much more auditing of people in H-1B status these days. (Edit: based on http://britishexpats.com/forum/showthread.php?t=676922 it sounds highly likely you're on shaky ground).

Last edited by rew1000; Aug 27th 2010 at 10:47 pm.
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Old Aug 27th 2010, 10:54 pm
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Default Re: Withholding tax = $0, how much should I pay?

Yes - what exactly is your immigration status?

A year ago you were talking about coming to the US for a couple of years on an F1 visa.

A month ago you were planning a trip to visit your Canadian girlfriend in the US, and ...
I'm not looking for a job and I don't intend to stay past my 3 months.
Today you are:
a UK resident and passport holder, first job in the USA, working as an engineering contractor, earning good money
How exactly did you manage that?

Last edited by md95065; Aug 27th 2010 at 11:15 pm.
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Old Aug 27th 2010, 10:56 pm
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Default Re: Withholding tax = $0, how much should I pay?

Don't forget state as well as federal tax (and also city if you are in NYC).
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Old Aug 27th 2010, 11:43 pm
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Default Re: Withholding tax = $0, how much should I pay?

>How did you manage that?
I'm like Dr Who, I constantly regenerate!

No, actually I am indeed visiting my Canadian girlfriend in the US and I posed the question on her behalf. She is a UK resident and does have a UK passport but she's here on TN status but I didn't think that would make a difference - I just didn't want to complicate things too much!

The employer is quite big and they have quite a few expats working there, I hope (and assume) they know what they're doing.
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Old Aug 28th 2010, 12:21 am
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Default Re: Withholding tax = $0, how much should I pay?

Originally Posted by paulw99 View Post
>
The employer is quite big and they have quite a few expats working there, I hope (and assume) they know what they're doing.
I suspect that they almost certainly do know what they are doing.

Whether what they are doing is legal or not is another question.

Anyway, if your girlfriend really is "self-employed" she had better start read up on what that means - and it means more than just income tax ...
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Old Aug 28th 2010, 12:45 am
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Default Re: Withholding tax = $0, how much should I pay?

Originally Posted by paulw99 View Post
>How did you manage that?
I'm like Dr Who, I constantly regenerate!

No, actually I am indeed visiting my Canadian girlfriend in the US and I posed the question on her behalf. She is a UK resident and does have a UK passport but she's here on TN status but I didn't think that would make a difference - I just didn't want to complicate things too much!

The employer is quite big and they have quite a few expats working there, I hope (and assume) they know what they're doing.
If I was her, I'd look into the legality of working as a contractor on a TN1 visa. Something doesn't seem right about an employer hiring someone on a TN, H1-B, or L1 visa as a contractor.

If it is illegal, it won't be the employer that is punished but the person on the visa.

Although Indian outsourcing companies farm out their H1-Bs as contractors, that person is an employee of the outsourcing company.
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Old Aug 28th 2010, 2:02 pm
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Default Re: Withholding tax = $0, how much should I pay?

Originally Posted by paulw99 View Post

I've tried searching the IRS sites, can't find anything about this, is it an unusual situation?

cheers
Look for info on being a 1099 contractor. That is the form that the employer will give your girlfriend at year end to evidence how much she has earned. In the meantime, she needs to estimate how much she will earn this year, and pay quarterly estimated taxes to the IRS and the state. She should hire a CPA to help with both this and the required year-end tax return, which is due by April 15 of the following year. Here's some info on working on a 1099 basis -- and note, as a contractor she is not actually considered a direct employee of the company.

http://www.wisegeek.com/what-is-a-1099-contractor.htm
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Old Aug 28th 2010, 4:50 pm
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Default Re: Withholding tax = $0, how much should I pay?

Originally Posted by paulw99 View Post
She is a UK resident and does have a UK passport but she's here on TN status
So for these purposes, she is actually a Canadian citizen, resident in the US on TN status, right?

Does she set her own schedule/hours? She'll want to make sure that if she is a contractor to her employer that that's allowed. I was under the impression that it is NOT for TN holders.

Yes, the IRS gets shirty.
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Old Aug 29th 2010, 5:14 pm
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Default Re: Withholding tax = $0, how much should I pay?

Yes, TN status. The company has lots of Canadian contractors so I assume/hope they've sorted out that out.

Thanks so much for all the info, we shall investigate.
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