1099????????????/?

Question

My husband and I are finally making some good money, but each check we get taxed like crazy, my husband talked to his boss and he said he would pay him with like a personal check, but that my husband would have to file a 1099. I spoke to a friend of mine who does taxes, and she said there are a lot of fees we are going to have to pay during tax season if we file 1099....does anyone know the pros or cons to filing 1099 or know a website that i can look it up??

Answer 1

It's not really going to affect your income tax liability. You would have to pay quarterly payments and would be assessed penalties if you don't. It would double your OASDI (SSN and Medicare) payments. Currently the employer pays those- its 7.45% of base earnings. And you would still have to pay federal taxes - those don't go down. The only person that, being an independent contractor in this situation, benefits is your husbands boss.

Just be grateful, you have money to be able to pay for the services you receive.

Answer 2

The boss and your husband don't just get to decide whether he's an employee (W-2) or independent contractor (1099) - that is set by law depending on job duties. See http://www.irs.gov/businesses/small/article/0,,id=99921,00.html for specifics.

That said: if he's on a 1099, he'll pay both the employee and employer halves of social security and medicare, which means he pays an extra 7.65%. If you have a tax preparer do your taxes, they'll charge extra for the extra forms they have to prepare, but it's probably not a lot. If you do it yourself or with something like TurboTax, then the cost is the same.

If he has expenses of earning the money he's earning, he would deduct those from his income, and only pay tax on the net. If he has expenses but is classified as an employee, he can only deduct the expenses that are over 2% of his AGI - or, if you file a joint return, your joint AGI, and then only if you itemize. If the expenses are the same either way, being able to deduct the whole amount of the expenses, and without itemizing, might or might not make up for the extra amount he'd have to pay for social security and medicare.

Answer 3

Go to www.irs.gov and search 'independent contractor'. As someone who is self-employed, I can tell you that what you will be doing is shifting the responsibility of paying your income taxes, FICA, and Medicare from your husband's employer to you. There are some benefits to working as an independent contractor and among them are the ability to write off more expenses and thus pay taxes on less of your income. I'm sure that your friend will tell you that your record-keeping better be immaculate and that the size of your tax return will double :-).
The IRS has guidelines to help people determine whether they can even be considered an independent contractor vs. an employee. Check out their publications and discuss this with your husband.
If you have calculated that you are going to receive a huge tax refund next year, you can change your allowances on your W-4 so that less tax is taken out. You can also contribute to a 401K if available so that money will go out pre-tax and you will keep more of your paycheck.
A good rule of thumb is that about 28% of your paychecks will go to pay taxes. If you have income in addition to your husband's, you may be getting bitten by the "marriage penalty". While this penalty has been reduced in recent years, it's still there. As an example, it did not pay for me to go to work when our kids were little, because anything I made pushed into the next tax bracket (I considered that I was taxed at the higher bracket). Therefore, after taxes and paying gas and child care, I was actually "in the hole" by going to work.

Answer 4

Your husband is an employee and therefore cannot legally be paid as an independent contractor.

As an independent contractor, your tax bill would INCREASE, not decrease, since you would have to pay both halves of the SS and Medicare taxes. On top of that, you would have to start making quarterly estimated tax payments to the IRS using Form 1040-ES. If you failed to make those estimated payments, you'd have a MASSIVE tax bill at the end of the year, along with penalties and interest for underpayment of taxes.

FYI, you would not file a Form 1099. He'd receive one instead of a Form W-2. You'd use the information to prepare your tax return.

Answer 5

When you are paid like this and get a 1099 at the end of the year you are looked at as self employed. This means that you are responsible for paying all of the Local, State & Federal taxes involved including Social Security.

The only good thing about it is that you can file schedule C and write off all of your expenses which lowers your taxable amount.

If your credit is very good this is not a problem, if it's not so good, it can be a real problem because most lenders require 2-years of back tax returns to prove your income. And if you use schedule C and write off everything it lowers your adjusted income along with your taxable income.

Answer 6

QB is right. Why don't you look into a 401K to shelter at least part of it until you are ready to retire if you're not IRA deductible eligible?