A
client recently emailed me some questions that I think are often asked of tax
preparers, especially now with the changes made by the GOP Tax Act. The answer to these questions, and the
debunking of some common misconceptions the answer includes, are important to
understand.
Robert
-
1.
Just wanted to ask you how do you report taxes at end of year on a 1099? I imagine in this case you report less than if
your employer was reporting on a W-2. Please explain what is advantage AND
disadvantage?
2.
I hear is that when you are working on your own or providing home care you can
report whatever you want, but I still want to accumulate for my Social Security. Am sure in this case you don’t have to pay city
taxes or Medicare, etc.
Madame
X
My
response:
Madame
X -
1.
Income from a Form 1099 is reported based on the source of the income. If it is a Form 1099-MISC reporting
“non-employee compensation” it is reported on a Schedule C or C-EZ of Form
1040, with deductions for directly related out of pocket expenses allowed. The net amount is subject to federal and
state, and if applicable city, income tax and federal “self-employment” tax,
which is the equivalent of both halves of Social Security and Medicare. A new special tax deduction of 20% of the net
income may be allowed. However, this new
deduction does not reduce net income subject to the self-employment tax.
The
amount that is reported by the payee on a Form 1099-MISC for non-employee
compensation is the same as the amount of gross wages reported for an employee –
the gross amount of the payment to you for services provided. Less income may be actually subject to tax
because of the deduction of direct out of pocket expenses related to earning
the income.
The
advantage of receiving income as a “sub-contractor” on a Form 1099-MISC vs
receiving income as an employee on W-2 is the availability of the deduction for
directly related out of pocket expenses and the new 20% deduction for “pass-through”
business income. The disadvantage is
that you pay both halves of the Social Security and Medicare tax – as an
employee you pay half and your employer pays half - although the amount of
income on which the self-employment tax is paid may be less than the gross
wages reported on a W-2 that are subject to these payroll taxes.
2.
It is NOT true that if you are
working on your own you can report “whatever you want”. By law you MUST report WHATEVER YOU
RECEIVE in full, whether or not you actually receive a Form 1099-MISC.
A
person being paid for providing home care is a “household employee” of the
person who is being cared for. The
person being cared for would need to withhold income and Social Security and
Medicare taxes, as any other employer would, and issue the person providing the home care a Form W-2.
As
a self-employed person, you would continue to pay into Social Security via the
“self-employment tax” and your net income would count toward the determination
of Social Security benefits.
RDF
Do
you have any questions?
TTFN
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