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Answers to Your Tax Questions


By Wayne M. Davies
Contributing Writer
Article Date: 03.11.03


Good day,

I was involved in a car accident and was unable to work most of the year (case is in litigation), however, I did get work doing Customer Support emails from home.

When I received my 1099-Misc I had made 4716.00 for the time that I did work. We are considered "Independent Contractors" i.e. business owners.

After doing my taxes, and thank gawd I qualified for EIC, I STILL have to pay taxes in the amount of 331.00. (Without that I was going to have to pay $666).

Talk about ROBBERY! :( lol.

Does this sound right to you????

Kandie

Hi Kandie,

Sorry to hear about your accident. Sounds like you're the innocent victim of one of the "grayest" of all "gray areas" of tax law: the infamous "Employee vs. Independent Contractor" issue.

I don't know the particulars of your situation to render an authoritative opinion, but it is possible that you should have been paid as an employee not a contractor.

Why is this relevant? Because employees pay only 7.65% of gross wage in payroll taxes (Social Security and Medicare tax). And the payroll tax is deducted from your paycheck so you never see it. The employer also pays 7.65% -- so it's a nice 50-50 split.

In contract, the independent contractor is considered self-employed and therefore must pay the dreaded Self-Employment tax (which is simply the self-employed's version of payroll taxes). Here's the catch: self-employed people pay both halves (15.3%) of the payroll tax; i.e. twice as much as the employee-employer scenario.

Your income was low enough that you probably didn't incur any income tax liability. But because the $4716 was reported on a 1099 instead of a W2, you had to pay Self-Employment tax, which is probably what the $666 is.

In other words, the numbers do sound reasonable to me.

Whether or not you got robbed, well, I should probably leave my editorial comments to myself! Suffice it to say that you are not alone in your conviction that taxes are a form a legalized theft.

Sincerely,
Wayne



I have recently re-activated a SARSEP account that was initially started 8 years ago. The SARSEP is not available for new plans but in my case it has been grand fathered back in.

I understand that it is tax exempt for federal tax withholding

My question is this, is the SARSEP tax exempt for State Withholding?

Your answer will be greatly appreciated.

Vic Tonas
www.tonasgraphics.com

Hi Vic,

The answer is "Yes" -- your SARSEP contributions are tax-deductible for purposes of both state and federal income tax.

Sincerely,
Wayne



Hi Wayne,

I'm a farmer thinking of selling some land. Do you know how to minimize the government’s take?

Charlie

Hi Charlie,

The tax consequences of a real estate sale are very "cut and dried". Not much room for creative accounting and other forms of numerical sleight of hand. You take the sale price (minus expenses related to the sale, like realtor commission, legal fees, closing costs, etc) and subtract your purchase price. The difference is your gain on the sale, subject to capital gains tax.

How long have you owned the property? If less than a year, you might consider waiting until you have owned for at least a year; then the profit will be taxed at the lower long-term capital gains tax rate.

But like they say on Wall Street -- "Don't let the tax tail wag the investment dog". i.e. Don't wait a year just to get the tax savings if you have an eager buyer willing to pay top dollar now.

Sincerely,
Wayne



Wayne,

I have a client who is an elementary teacher because she is an outstanding teacher, a local foundation awarded her $2,500.00 she did not apply for this grant, just did her regular job she received a 1099-misc with the $2,500.00 in box 7 she was not an employee of the foundation where should she report the $2,500.00? Does she have to do a schedule C and pay self-employment tax on this ?

Thanks

Warren Dixon
wdixon@wftfcu.com

Hi Warren,

This is a great question. Typically, amounts reported in Box 7 of Form 1099-MISC are considered self-employment income, reportable on Schedule C and subject to self-employment.

But, alas, there are always exceptions to rules, even tax rules.

I would be very comfortable reporting the $2,500 on Form 1040, Line 21, "Other income". Include a brief description such as "Form 1099-MISC award." By reporting the income on Line 21, you legally avoid the self-employment tax. Based on your description, this was not self-employment income and should probably have been reported in Box 3 (Other income) of Form 1099-MISC rather than Box 7. And reporting the 1099-MISC amount on Line 21 will satisfy the prying eyes of the IRS computer.

This is a classic case of substance over form (pardon the pun).

Sincerely,
Wayne


About the Author:
Wayne M. Davies is author of the new eBook, "The Tax Reduction Toolkit: 29 Little-Known Legal Loopholes That Will Reduce Your Taxes By Thousands (For Small Business Owners and Self-Employed People Only!) Don't file another tax return until you visit: http://www.YouSaveOnTaxes.com/toolkit.html



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