Tax Tips Blog

Mike asks: My name is Michael and am in need of some help. The company i work for just proposed switching me from a W2 to a 1099. I currently earn 24k a year gross salary but they want to cut my pay to what i make net and have me as 1099. They tell me it would be the same money im making now, i asked them what happens when i have to pay out taxes at the end of the year and their answer is i can claim all my food and gas expenses to counter me having to pay out taxes in addition to an office in my parents home. Please advise if this is possible or even a good idea, i really would appreciate your help.

My reply:Hello Mike!

Your employer does not get to decide if they can pay you as a W-2 employee or a 1099 contractor. The law determines your classification. I wrote an article about this, which you can find here: http://glgcpa.com/blog/2006/08/06/employee-or-independent-contractor/

If you want the IRS to inform your employer as to whether or not they should be issuing you a W-2 or 1099 then complete Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

You didn’t tell me what kind of work you do or why all your food or gas would be considered a legitimate business expense, but food is rarely 100% deductible. Valid, substantiated meals are usually deductible at 50% of the amount spent. Gas is deductible based on the percentage of business use of your vehicle, assuming the business use has been properly documented. For gas to be 100% deductible you would not be able to drive your vehicle for any personal reasons (like going to the grocery store), nor would you be able to drive to or from work.

In addition contractors need to pay self-employment taxes, this includes the employee part (which you’re having withheld now) and the employer part (which your employer is paying now). Thus, it appears that your company is trying to pull a fast one on you.

Best wishes,
Gina

NOTE: I have received several requests as to why I have not been posting.  There are many reasons, but mostly because most of the questions I am receiving I have previously answered.  If you search my site you may be able to find an answer to your question.  Having said that I will try to post some of the past questions I have received and perhaps some reminders of what to watch for this tax season.

Without further ado…

Joyce Asks: I am wondering if it is not possible to treat the children as independant contractors  which would mean that you do not have to contend with unemployment compensation (are you really going to fire your own child?).  You could then set up a very simple contract for services between you (the sole proprietor) and your independant contractors.  The bookeeping would be very simple.  You could do a payment per task completed type of contract.

Also, I am wondering if the children can open a Roth IRA which could give them quite a jumpstart towards a wealthy retirement? They most likely wouldn’t need the tax deduction if they made less than the threshold traxable amount.

My reply: I have discussed much of this before in these three articles:  Benefits of hiring your children and parents, Hiring Children, and Employee or Independent Contractor.

First, I would think it would be very hard to hire most children (depends on their age, maturity level and other source of income) as an independent contractor and be able to support that decision.  As I stated in my previous article, you don’t get to just choose if your workers are employees or independent contractors it is a matter of law.  The first thing that the IRS looks at is are you providing them a place to work?  If your child has their own place to work that surely is impressive.  Second the IRS wants to know if you are providing them the tools to do their job.  If your children have their own money from a source other than you and they used that money to purchase whatever tools they will need to do their job (dust rags, window cleaner, whatever), then I guess that works.  The third thing the IRS wants to know is if you need to tell them how to do their job and/or provide them any training?  If you need to do this, then they’re your employee.  There are many other questions as well, including, do you want to retain the ability to fire this person?  If so, they’re an employee.  So, as you can see it’s hard for a child, especially a young child, to be properly classified as an independent contractor.

Second, and again, as I have explained in one of those prior articles, if you are self-employed (sole proprietor or LLC taxed as a sole proprietor) you will not have to withhold Social Security or Medicare taxes nor will you have to pay unemployment taxes as long as your child is working for you and they are under the age of 18 and you will not have to withhold Federal or State taxes if they earn less than the minimum required to do so.

Third, and again, as I stated in one of those prior articles, yes you are allowed to open IRAs for your children, which can further reduce taxes and help save for their college education and/or retirement.

Ebtehal writes:

I just started LLC company. I hired only one employee as part time for 3 months. How I should deduct his social secuirty and when and where should I submit it. If he make more than $102,000 from his full time job over the 9 months. Should he still pay Social security tax.

Thanks,

Ebtehal

My reply:

Hello Ebtehal, thanks for visiting.

Payroll is more complex than most new businesses realize.  I really do not recommend that any new business do their own payroll.  I wrote a post a couple of years ago about this, which you can read here:  http://glgcpa.com/blog/2006/10/09/payroll-headache/

The first thing you should do is obtain a copy of Circular E (publication 15) from the IRS website, which you can find here:  http://www.irs.gov/pub/irs-pdf/p15.pdf

If you don’t have a Federal Employer ID number you’ll have to get one of those too.  You can do that online here:  http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

Then locate the website for your state department of labor and read their rules.  Often times you need to inform them when you hire someone.  In addition you will have to set up accounts for withholding, if applicable, and unemployment compensation.

When you hired this employee they should have completed Form W-4 and I-9.  The information contained on these forms and Circular E will tell you how to withholding, how much to withhold and when you need to deposit the Federal amounts to the respective Federal authorities.  You’ll have to get the state information from your state department of labor.

It doesn’t matter if your employee is making more than $102,000 or $202,000 from some other job your employee might have - you are still required to withhold at the specified rates.  Then at the end of the year, the employee can apply for a credit of any over withholding on their individual tax return.

My best advice - get someone to help you and fast.

Best wishes,
Gina

Oscar writes: My wife owns a small home-daycare, never more than 15 children. She operates out of our house. She has one full-time (employee) for whom she pays all taxes and medicare and two other part-time contract employees. Her business is legally registered as an LLC partnership. One of the part-time contract employees is demanding that my wife pay SS and Medicare because her tax preparer told her my wife was obligated to do so. Is my wife liable to pay SS tax and Medicare tax for part-time contract employees who received a 1099 from her business? How does one address this amicably without any repercussions to either party? Thanks!

My response: Hello Oscar and Happy New Year! Thanks so much for visiting my site and sending me an email! To answer your question, I have my doubts that the two part-time “contractor” employees are actually 1099 independent contractors and obviously so does that employee and his/her tax preparer. If your wife’s part-time contract employees are actually employees, then yes your wife’s LLC should be paying Social Security and Medicare and possibly withholding Federal Income Tax as well. You may want to read the article I wrote on employees and independent contractors. As for addressing the issues with your help, the best thing to do is to be honest with them. Why did you think they were independent contractors? If your accountant or tax advisor suggested paying these people as independent contractors, I’d start looking for a new advisor. Let your wife’s employees know why you felt they were independent contractors and what you intend on doing about it now. Best wishes, Gina

Rosemarie from Saugus, MA inquires: Re: your article on Hiring your children…Can you pay them by depositing money directly into a 529 plan for their education each month - as opposed to a pay check?

I reply:Hello Rosemarie! Thank you for visiting my blog. If you hire your children to work for you, in your business, and pay them a reasonable wage for their age and the service they perform, you can deposit their net payroll check into their Section 529 plan (or a bank account in their child’s name, or their own Roth IRA). You will still have to issue them a W-2 at the end of the tax year, but if your business is taxed as a sole proprietorship (Schedule C on Form 1040) or partnership (Form 1065), then you don’t owe any Social Security or Medicare taxes on your child’s wages until they reach age 18 years and 6 months. You don’t owe Federal unemployment tax until they reach age 21 and 7 months. Hiring your children may also help you establish a medical expense reimbursement plan, education assistance plan or retirement plan. Before you hire your children it is best to speak to your tax professional to make sure you are paying them a reasonable wage and have properly documented them as a true employee.

Best wishes, Gina