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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