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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:

What is an “Associate?” Employee or Independent Contractor?

Associate/Independent Contractor Issues - A Wrap-Up

I sat down a week or so ago with a new DC who was looking at an associate contract.  My question to him: “If you had to live on just the base, could you do it?”  Here is what we did:

Monthly Base                          $2500

Income Tax                              $  375

FICA                                           $192

Student Loan payments          $800

Available                                    $1133

So, can you live on $1133 a month?  What if you had a family?  And your spouse couldn’t work?  This doesn’t seem possible, does it?

But, you say, “I’m going to make lots on incentives/bonuses each month.”  But what if:

(a) The doctor made you work for him while he went on vacation and you couldn’t get your own patients in?

(b) The doctor did everything in her power to keep you from getting the incentive, even if you are seeing new patients and bringing in money (this happens more often than you can imagine)

(c) You have to take time off for a family emergency or you are just not able to bring in new patients one month.

Scary thought, isn’t it?  This young doctor was in the Seattle area, where the cost of living is even higher.  Unless his wife works, it doesn’t seem like this is a good deal for him.  What do you think?

There is a little-known section of the IRS Code that gives small businesses a break on equipment purchases. It’s called Section 179. Here is how it works:

If you buy equipment for your practice, up to $500,000 this year, you could deduct a portion of the cost, up to $125,000 on your taxes. Here is more detail on what equipment can qualify, from Crest Capital:

“Tangible Goods financed by Equipment Loans or by most types of Equipment Leases (Non-Tax or Capital Leases) qualify for this deduction. Examples of Non-Tax (Capital) Leases include a $1 Purchase Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease.”

The “catch,” if there is one, is that the total cost of the equipment you want to expense can’t be more than your total taxable income. To see how this deduction might affect your new practice, click on this link for a deduction calculator:

http://www.crestcapital.com/tax_deduction_calculator

For more information on this and other tax questions for your small business, check out my favorite tax link: www.taxgirl.com.

And of course check with your tax advisor. This is one of those things you can’t make a New Year’s resolution about. You just need to do it now.

The question of the day was:  I am ready to start my practice, but I really don’t want to have to pay a CPA.  Can’t I do my taxes myself with good accounting software?

I’m always curious why chiropractors think they can do it all themselves.  You were trained as a chiropractor, not an accountant.  Even if you are starting out your chiropractic practice as a sole proprietorship, you need an accountant, and you REALLY need a CPA.  So what’s the difference?

An accountant or bookkeeper can do your monthly/quarterly accounting and help you with payroll taxes and some other tax filing, but a CPA has to keep up to date with tax issues and is able to go with you to the IRS if you get audited.  If you think taxes aren’t complicated, here is a site that lists federal, state, and local taxes, called “Tanned Feet.” 

By the way, a CPA is not a financial planner, although many can give you tax advice.  A financial planner can help you figure out how to set up pension and profit sharing plans, and 401k’s and all that tax-shelter stuff.
Here is my suggestion:  Find a local CPA who has a bookkeeper on staff, someone who can help you with QuickBooks or other financial software.  At some point when you start to make lots of money, start looking for a financial planner too.