09th Jan 2009
Who Pays the Taxes for an Independent Contractor?
I’ve talked before on this blog about the issue of independent contractor vs. employee, and the problem of calling a worker an “independent contractor.” I recently found a U.S. Tax Court case the points up an additional concern that might come your way, if you are an independent contractor. What happens if you are hired as an independent contractor and no one pays the Social Security/Medicare taxes?
Being Hired as an Independent Contractor. In this case, a worker was hired by a company to do some work over several years. The company, calling him an “independent contractor,” did not take payroll taxes (Social Security and Medicare) from his checks, nor did they set aside money for the employer portion of these taxes. Each year, the company gave him a 1099-MISC (reporting income for contractors) instead of a W-2 (reporting income for employees). He didn’t report this income (somehow figuring the IRS wouldn’t find him), nor did he pay self-employment taxes (the full amount of Social Security and Medicare owed on his income for those years.)
The Tax Court Ruling. The IRS said he should have been considered an employee, and the Tax Court ruled that he was an employee (you can read more about this case and the Court’s opinion to find out why). Then the question came up, as it always does: Who is going to pay the income taxes and self-employment tax? The worker must pay the income taxes, of course, but he was also required to pay the self-employment taxes for those years. The employer was not required to pay these taxes.
What Does This Case Mean for You? You go to work in a chiropractic practice and when you receive your first check, you see there is no withholding for income taxes and no deduction for Social Security and Medicare. No matter what your contract says, you are being paid as an independent contractor.
Congratulations! You are now self-employed, in the eyes the IRS, at least. You should:
1. Start setting aside money to pay your income taxes, since nothing is being withheld.
2. Also set aside money to pay the payroll taxes (figure 15.3 percent on your net income from your self-employment as an independent contractor).
3. Start adding up your business expenses so you can lower your income and pay less income tax and payroll tax. More on this in the next post….
Related posts:
I’ve talked before on this blog about the issue of independent contractor vs. employee, and the problem of calling a worker an “independent contractor.” I recently found a U.S. Tax Court case the points up an additional concern that might come your way, if you are an independent contractor. What happens if you are hired as an independent contractor and no one pays the Social Security/Medicare taxes?
Being Hired as an Independent Contractor. In this case, a worker was hired by a company to do some work over several years. The company, calling him an “independent contractor,” did not take payroll taxes (Social Security and Medicare) from his checks, nor did they set aside money for the employer portion of these taxes. Each year, the company gave him a 1099-MISC (reporting income for contractors) instead of a W-2 (reporting income for employees). He didn’t report this income (somehow figuring the IRS wouldn’t find him), nor did he pay self-employment taxes (the full amount of Social Security and Medicare owed on his income for those years.)
The Tax Court Ruling. The IRS said he should have been considered an employee, and the Tax Court ruled that he was an employee (you can read more about this case and the Court’s opinion to find out why). Then the question came up, as it always does: Who is going to pay the income taxes and self-employment tax? The worker must pay the income taxes, of course, but he was also required to pay the self-employment taxes for those years. The employer was not required to pay these taxes.
What Does This Case Mean for You? You go to work in a chiropractic practice and when you receive your first check, you see there is no withholding for income taxes and no deduction for Social Security and Medicare. No matter what your contract says, you are being paid as an independent contractor.
Congratulations! You are now self-employed, in the eyes the IRS, at least. You should:
1. Start setting aside money to pay your income taxes, since nothing is being withheld.
2. Also set aside money to pay the payroll taxes (figure 15.3 percent on your net income from your self-employment as an independent contractor).
3. Start adding up your business expenses so you can lower your income and pay less income tax and payroll tax. More on this in the next post….
Related posts:
Posted in contract questions, associate and independent contractor issues, tax issues, financial questions | No Comments »
