Wednesday, October 15, 2014

Tax Time! 1099 vs W2

Tax Time! 1099 vs W2

Hey readers!

It is getting to be that time where people like me that have been working at home for a while start breaking out the calculators to pay Uncle Sam. Yep! Tax time is around the corner, and for those of you that are tax preparers, I would suggest taking a look at the IRS website to see some of the new regulations and requirements for the 2014 filing season.

Anywho! As a tax preparer, I try to explain to many people about the differences between being an independent contractor and being employed by a company. No one likes it, but everyone has tax responsibilities. This is 'MURICA! The IRS wants their money and I am going to explain some key differences between classifying yourself (and your employees, if you have any) under a W2 employee or a 1099 contractor.

Employee and Independent Contractor Explained

According to the IRS, an independent contractor is as follows:
"...an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. 
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self Employment Tax."
So, in the most simple of terms if you do not get to set your own schedule or direct the work that is being done, you are most likely an employee.  If you are currently an employee and taxes get taken out of your check each and every pay period, come January, you will be issued a W2 from your employer. If you are an independent contractor, you receive full pay from your job and no taxes are taken out which usually ends up in a higher net income. If you make over $600 per year, then your company will issue a 1099. Doesn't seem fair, does it? The reality is that independent contractors will pay higher taxes because not only do they owe an income tax, but they also owe a self-employment tax as well! On average, an independent contractor will be paying near 16% of their taxable wage where as someone that is employed and issued a W-2 will pay an average of 8%. That's half of the tax someone that is self employed will have to pay!

In the past few years, the IRS has been cracking down on employee misclassification. From large companies, to tiny start-ups the fines can be outrageous if you do not file your taxes properly and completely.

Plan Your Tax Liability

Now, if you are going to claim as a self-employed or an independent contractor, I STRONGLY encourage you to start planning your tax liability as soon as you are able! I cannot count how many new business owners that I have encountered that reaped the benefits of owning their own business, but did not plan for the tax portion at the end of the year. 

The IRS recommends to send in quarterly payments of up to 20% of earnings to fulfill tax obligations. If there is any overages, you will just receive a refund just like any other person that is earning a wage. For more information, feel free to visit the IRS website.


I will continue to post weekly about what to expect this tax season and some more tips to hopefully maximize your refund and minimize your tax liability.



Thanks for reading! As always, I love comments! Leave yours below!
shanicepatrella@yahoo.com
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