Are you an Independent Contractor or Employee?

This is a big issue that can have a drastic impact on how you are taxed. If you are getting a 1099-Misc you are an independent contractor—you are considered self employed the same as if you had your own business. You will have to file a Schedule C and pay Self-Employment taxes of 15.3% of your net income in addition to income taxes.

If you really are an employee, there is no Self-Employment tax, but you will have Social Security and Medicare taxes taken out which amount to 7.65% of your gross income. In most cases you are better off being treated as an employee. Employers reduce their taxes by paying you as an independent contractor as well as avoid paying benefits such as health insurance.

If you are being classified incorrectly as an independent contractor, you can correct the problem by filing a relatively new form with the IRS—Form 8919, Uncollected Social Security and Medicare Taxes on Wages. By filing Form 8919, so you avoid paying Self-Employment taxes. This form can be filed when you file your individual tax return. In addition you will need to send in a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding separately. You will be required to pay your share of Social Security and Medicare taxes.

Many clients do not do this out of fear that their employer will terminate their employment. By filing a Form 8919, your employer will have to pay their share of payroll taxes and will be fined for filing and paying late. Employers will also be fined and pay a late fee on Unemployment taxes.

If you are terminated as an employee because of this, you do qualify for unemployment compensation based on the rules of your state that you reside. Ultimately the IRS will make a determination of your employment or independent contractor status. Your employer has the right to contest your status. If your employer appeals and you are considered an independent contractor, you will have to amend your return and pay the additional taxes associated with being self employed.

Tax Debt Advisors, Inc

Scott Allen, EA

Tax Debt Advisors Inc Mesa

Here is a typical scenario. The husband is self-employed and never paid any taxes on jointly filed tax returns. The divorce decree says that the husband is responsible for paying all the back taxes. The IRS is coming after the wife. Will the divorce decree stop IRS action against the wife?

First, if you are an innocent spouse you might first seek relief under the innocent spouse relief rules. The IRS will consider factors like your knowledge of the unpaid taxes, spousal abuse claims and whether you received some benefit from the unpaid taxes.

Second, the divorce decree does not limit the IRS from taking action against you. When you signed a jointly filed tax return you accepted responsibility for the accuracy of the return and payment of the taxes owed.

Third, if your signature was forged or you signed the return under fraud or duress, the IRS will convert your joint liability to married filing separately. You will be responsible for paying taxes only on your income.

Fourth, you have several options available to settle with the IRS if you are held responsible for the taxes owed on the jointly filed return. These include: filing for discharge of taxes due with a bankruptcy, an offer in compromise, qualifying for non collectible status or the statute of limitations on collection.

Scott Allen E. A.

Tax Debt Advisors Inc Mesa