Please Help! I am working under a 1099 and need info.?

Question

I have recently been working aprx 30 hrs per wk under a 1099. I currently have no other income but my wife does work under W2. I'm looking for a clear explination of what 1099 means come TAX time. What percentage should I be setting aside to pay for the taxes? I've reviewed the IRS site but not able to make clear sense of it all. Any links or reponses greatly appreciated. Thanks in advance.

Answer 1

A 1099 is a form for an independent contractor. Assuming you are correctly classified as a contractor rather than an employee (a very big if) you use Schedule C to compute your profit or loss from business.

Your profit will be taxed at your marginal tax rate, but it is also subject to self-employment tax at an effective rate of 14.1%. If you and your wife combined are in the 15% tax bracket, you would need to keep back 29.1% for federal taxes. You would also need to add whatever your state amount is, if any.

As a side note, an employer cannot simply choose to pay you as an independent contractor. Your work relationship has to meet the requirements. Under your current arrangement, you are paying your own social security (via the self-employment tax), and are not covered by either unemployment or workers comp. If you are unsure if you should be an employee or an IC, check the IRS website.

Answer 2

It's early. This is the first time today I have posted this.

I have a canned explanation to apparently clueless independent contractors:

Some employers try to get around paying employment taxes (social security and unemployment) and other employee benefits like workers compensation insurance by improperly classifying employees as independent contractors. The basic issue is the amount of control the employer has over the worker. If you are required to show up for work--personally--at a particular time, punch the clock, use the employers equipment and are paid an hourly rate, you are an employee. If you didn't understand the difference when you posed your question, I would be even more convinced that you are an employee. What is your preference, Slotted or Phillips? Complete an IRS Form SS-8 to get an official ruling on your status. This will help you get unemployment if you get fired. When you file your income tax return, you can attach Form 8919 Uncollected Social Security and Medicare Tax on Wages and only pay the employer's half of social security. You will still have to cough up all the income tax. IRS and the states are stepping up enforcement in the abuse area.

Answer 3

You'll pay around 14% of your net for self-employment taxes - that's for social security and medicare. It's higher than if you were a W-2 employee, because then your employer pays a matching amount to what you do.

You'll also pay income tax - the percent will depend on what you and your wife make together. If it's under around $80,000, then figure 15% for federal. Depending on where you live you might also owe state and/or local income tax - the percent there could be 0 or over 10% depending on where you live.

If you have any allowable work-related expenses, you can show those on your return and won't pay tax on that part of your 1099 income.

You'll show your income, and any allowable expenses, on a schedule C or C-EZ. Then you'll need a schedule SE to calculate your self-employment tax. The numbers from the bottom of the two schedules will transfer to your 1040. You won't be able to use 1040A or 1040EZ.

Good luck. If you have a lot of work-related expenses, this might be a good time to have a CPA (not H&R Block) do your tax return.

Answer 4

I will assume that you have no deductions such as equipment or travel for your work as an independent contractor. I also assume you will have less than $97,500 of earnings subject to Social Security for 2007 (slighly higher in 2008).

You will need to set aside 15% of your earnings, plus the percentage of earnings that is your tax bracket on your W-2. If you are in the 15% tax bracket, you will need to set aside 30%.

After you have set this aside, each quarter you should pay this as estimated tax. That way you should not owe any interest or penalties for late payment or underpayment of taxes.

The irs.gov site has the Instructions to Schedule C. This is the best summary of what deductions you may be able to take, and how you fill out Schedule C, which is what you will attach to your tax return.

Answer 5

Do you have children?