Hey everyone, tax season continues to heat up for yours. The topic of the day is self-employment. This topic covers a wide swath of people, too wide to cover here in its entirety, because it includes even corporations, especially S corporations and LLCs that are one-man shops, even though they were incorporated for legal protection or tax advantages or both. Today we’re going to talk about people who are unincorporated and receive a 1099-Misc for services they perform, or checks from their clients without a 1099-Misc. Some of these people are “unknowingly self-employed,” meaning the people they work for, in order to avoid paying half of their payroll taxes, unemployment insurance, etc. list these people as independent contractors even though they are technically employed by the IRS definition.
The problem lies in the fact that many people who earn their living, or even part of their livelihood, in this way still act as if they are fiscally employed, but thinking this way is like standing next to the toilet tank. down lots of money. I see too much of this! Do not do this! Unless, of course, you have more money than you know what to do with, and from what I’ve seen, there aren’t many of us. Don’t get me wrong, it’s not TOTALLY the fault of these people. Their parents taught them that if they go to work every day, they do their best, they get paid every two weeks. Starting a business on your own is simply “hanging up your shingle,” printing some business cards, and telling your friends and family what you do. While this is wrong on many business levels that I won’t address here, but from a tax standpoint IT’S KILLING YOU, STOP IT NOW!
EARN-PAY TAXES-SPEND vs. INCOME TAX, EXPENSES AND PAYMENTS
The above concept, in my opinion, is THE CRITICAL DIFFERENCE between the self-employed, corporations, and everyone else. Understanding this concept and implementing it can be the difference between spending money LEGALLY on your business before you pay taxes, or contributing more to politicians to spend on things you don’t care about (like block grants to study the bog spider in South America). ). ), or contributing more to the Social Security and Medicare systems, both of which are currently scheduled to go bankrupt, is just a matter of officially when. When you receive a 1099-Misc, you get everything you earned. ALL OF IT! There are no federal, state or local withholdings, no 401k contributions, no unemployment insurance contributions, no union dues, EVERYTHING YOU EARNED IS YOURS. That’s the good news. Now, before you get too queasy, let’s talk about the BAD NEWS. When you are an employee, your employer pays half of your payroll taxes (Social Security and Medicare). Normally this total has been 15.3%, you pay 7.65% and your employer pays the other 7.65%. It was a little lower in 2010 with President Obama’s reduction in payroll taxes and continues through 2012. However, you must pay DOUBLE THE PAYROLL TAX if you are self-employed. The only silver lining to this is that the IRS allows you to deduct the employer half on the “adjustments to income” portion of Form 1040, so you’re not “double-hit” with double payroll tax AND payroll tax. about rent.
THE DOUBLE BLOW…
As if paying double payroll taxes isn’t bad enough, it gets worse for the self-employed and the ignorant. Now you must also pay income taxes on half of the remaining income, minus, of course, the half that is deducted, as mentioned above. Sure, you have the opportunity to reduce it further after that if you file Schedule A (itemized deductions), but Schedule A is limited if you make too much money, plus those itemized deductions are the first things added back in for purposes of calculating the Alternative Minimum Tax (AMT).
… MAKE THAT POSSIBLY TRIPLE HIT
Just because there is no withholding on a 1099-Misc, does NOT mean you don’t owe it, in fact, if you don’t pay a certain amount in estimated taxes at the end of the year (preferably quarterly), you’ll get a small penalty assessed at the bottom of your Form 1040, which is listed on Form 2210.
IT DOES NOT HAVE TO BE THIS WAY
I first built it by telling you that you can keep all your money when you receive a 1099-MISC or when your clients pay you directly. Then I broke it all down by telling you how you COULD BE HIT with taxes and fines. So, you might be wondering, why in the world would anyone want to be self-employed? How do many who own a business become so financially successful? The answer is that the NOT IGNORANT can obtain many tax advantages by knowing how, when, where, what and why of the deductions. Successful small business owners are not necessarily general tax experts like a CPA or EA, but they DO know the taxes that apply to their business VERY WELL! They buy office supplies, liability insurance, take business trips to exotic places, give gifts to clients, take continuing education classes, and many other great benefits, legally and before giving a hundred dollars to the failing Social Security and Medicare system. . But even after this, they have some additional options in the “Adjustments to Income” area at the bottom of the 1040 form. Known in the financial industry as “above the line deductions,” they are not limited by income like “deductions below the line.” line deductions,” such as Schedule A.
These not ignorant small business owners have the benefits of freedom, AND control of how much they pay in taxes. Those who are employees do not have this available, those who are autonomous and ignorant by not continually taking advantage of these breaks… well, from those of us who DO take advantage of what is being given to us, thank you very much for being a friend and giving more than what you need, but you really shouldn’t have. Seriously, you shouldn’t have, and in Part 2 of Ignorant Self-Employed we’re going to take a closer look at how you move to the non-ignorant side of the aisle. I hope to see you there.