Reporting 1099 / Schedule C?

Question

My husband started a new job early in 2006 and they did not withold taxes. We received 1099-misc for the job. When I put in his salary (significantly less than the year prior), it requires the Schedule C - which "double whammys" us. It is input as non-employee comp. He doesn't have any expenses per se. We have always gotten a return....and this has us paying over $10,000. What am I doing wrong here?
Oh, I'm using TurboTax to calculate it, by the way.

Answer 1

He was treated as an independant contractor, he should have been making estimated quarterly payments through the year to make sure the taxes were paid during the year as he was being paid. If you are not able to full pay what you owe by April 17th, send as much as you can with the return. Call the IRS and begin making monthly payments on the balance due, You need to start making the quarterly payments on his earnings, the first one due for 2007 is on April 17th. When you call the IRS they can order the 1040 ES payment vouchers for you

Answer 2

If your husband received a 1099 then he was considered self-employed. He did not have any tax withheld and therefore now owes all federal, state, and self-employment tax (15.3%) at the due date. If your husband will be receiving a 1099 again for 2007 you must file quarterly estimated taxes. You would make payments on 1/15, 4/15, 6/15 and 9/15. So technically on April 15 he should be also paying an estimated tax payment for 2007s income. Otherwise you will incur penalties for late payment.

Does your husband have any travel expenses? He can take a deduction of .445 cents per business mile driven. If he pays for his own health insurance he could also deduct that on the face of the 1040. He should consider setting up a SEP retirement plan. He could still make a contribution for 2006, and also get a tax deduction for this. This way he is also saving for retirement.

Answer 3

You're not doing anything wrong -- but he is. He didn't make the required quarterly tax payments using Form 1040ES and now you have a massive tax bill. And probably some penalties and interest for late underpayment of estimated taxes on top of it.

Make sure that it prepared the Schedule SE and calculated the Self Employment tax as well. That is necessary since he wasn't subject to withholding and now has to pay double the Social Security and Medicare taxes. When you're an employee, your employer pays half and you pay half. But when you're self employed, you have to pay the whole thing.

You also need to start making those quarterly estimated tax payments. The first one is due on April 17, 2007. Three more are due on June 17, Sept 17 and Jan 15, 2008. If your income will be the same for 2007, you'll probably need to pay in $2,500 with each payment coupon.

Sorry to be the bearer of bad news, but that's the way that the system works.

Answer 4

You probably aren't doing anything wrong, although I know that's not the answer you were hoping for. If he didn't make quarterly estimated payments, then he now owes all the income taxes on the amount, plus self-emplyment tax of 15.3% to cover both the employee and employer halves of social security and medicare, plus penalties for underpayment.

You could have a CPA prepare your return - he or she might be able to suggest some eligible expenses that you aren't thinking of, to lessen the tax bite a little.

The IRS will set up a payment plan for you if you can't pay it all at once, but you need to file on time to avoid additional penalties.

Answer 5

Unfortunately, your calculations are probably right. The employer should have told him he was being paid as an independent contractor so you could anticipate this or he should have realized no taxes were being withheld from his check each week.

There are expenses he can claim. Vehicle expenses- I think the IRS allows 44.5 cents per mile for business travel. Any small tools or office supplies he had to buy during the year. You can also deduct home office expenses, including a portion of your phone and utility bills. Computer and internet might also be partially deductible. You might want to consult a tax professional to help you out with what's allowable. Also, you'll probably have to make estimated tax payments for next year to avoid any penalties.

Answer 6

I do not understand.

You first say he received a 1099. Then you say when you put in his salary. Well, salary is W-2, not a 1099. Was there withholding? Was a W-2 issued?

You need to differentiate between independent contractor income and salary.

If you have withholdings, the gross pay is reported "ONLY" on page 1 of Form 1040
and the Federal Withholding, "ONLY" on Page 2 of Form 1040. It is never transferred to a Schedule C, period. Never ever.

If you dont have any withholding, report the monies received on Form Schedule C,
claim your deductions, and continue on to Schedule SE.

Turbo Tax is the best tax software available for middle income taxpayers. There is no way TT would direct you to disclose Salary and 1099 income to a Schedule C.