independent contractor | robergtaxsolutions.com

If you receive a 1099MISC document in the mail, and there’s a dollar amount listed in box 7 for Non-employee compensation, the IRS treats that as self-employment income and you’re supposed to pay self-employment tax on that income. If you own your own business, that’s perfectly normal. By the way, I’ve got lots of blog posts and tax tips for self-employed folks on this web-site so be sure to check those out. I’ve got a list at the bottom.

But what if you’re not self employed? Really not self-employed. You’re stuck with a document that basically requires you to pay extra tax, what do you do?

First, only dollar amounts in box 7—count as non-employee compensation. If you received dollar amounts in box 1 for rents or box 3 “other income” you don’t have to worry about the extra self-employment tax. The rent goes on your Schedule E for rental income and the other goes on line 21 of your 1040.

But let’s get back to that non-employee compensation again. What did you do to earn that money? Is it in your field of work? If the answer is yes, then it’s going to count as self-employment income even if you don’t think of yourself as being self-employed.

I’m going to use my friend Rick as an example. He works for another tax company and he’s very good at what he does. Every year, Rick gets laid off on April 15th. My company stays open all year round and sometimes I’m super busy in September and October. I could probably use some extra help around then. If I hired Rick to help me with some tax returns, I’d give him a 1099MISC for the money I paid him and he’d have to report that as self employment income. Even though Rick normally works for another company, he’s still in the business of preparing taxes. The money I pay him for tax prep would definitely be considered self-employment income.

But let’s say I hire Rick to paint my office instead. Rick’s not a painter, he doesn’t do that as a business, he’s just helping me out because I need my office painted and I’m helping him out because he needs the money. We’re friends. Painting is not his line of work. So technically, he’s not self-employed and he shouldn’t have to pay self-employment tax on that income. It’s a one shot deal never to happen again. How do you account for that?

Well, it used to be that if you received a 1099MISC for non-employee compensation for under $1000 and you put that amount on line 21 of your 1040—the IRS would let that slide and not audit for self employment tax. But starting with 2013 tax returns, the IRS has announced that they will send notices to anyone with 1099MISC income (with non-employee compensation) on line 21 instead of putting it on a Schedule C—where it will be taxed with self-employment tax.

There’s no box to check or form to fill out with your 1040 to say, “Hey, I’m not self-employed! I shouldn’t have to pay self-employment tax!” So what do you do?

You’ve basically got two options:

One: Claim the income as business income and write off any and all expenses associated with the job. This is going to be the best choice for people who have expenses with a job like mileage or supplies.

Or, two: File your 1040, pay the self employment tax, and then file an amended return 1040X taking the income out of self employment and putting it on line 21 with the explanation that you are not self-employed and the income should not have been subject to self employment tax.

Why do this as an amendment instead of doing it that way the first time? Because the IRS has already announced that they are sending letters out to anyone who puts 1099MISC for non-employee compensation income on line 21. And they charge fines and penalties for underreporting your tax.

By filing and paying the self-employment tax first, then amending, you’re giving the IRS the opportunity to examine the situation and make a determination. You may win, you may lose. But if you win—the case is closed and they won’t come back at you. If you lose—it doesn’t matter. You already paid the tax and they can’t fault you. No harm, no foul.

Most people who receive a 1099MISC for non-employee compensation are going to be considered self-employed by IRS standards. You may as well file the schedule C with your tax return and pay the self-employment tax. If you think you might be an exception give us a call, we can help you sort out your options.

I’ve you own your own business and provide service to another company, they may ask you to fill out a W9 form.

If you own a business and you pay for services to an individual, and you expect to pay over $600 for those services, then you should have that person complete a W9 form for your files. You’ll need the information in order to prepare the 1099MISC forms next January. Also, you only need a W9 if someone is working for your business. For example: when I have Brad the Painter come to my house to replace my damaged siding—I don’t give him a W9, it’s a personal service to me. Now if I hired Brad to paint my office, then I’d have to collect the W9 because it would be a business expense.

The general rule here is if you’re writing the service off as a business expense, then you’ll need to collect a W9 from the vendor.

Who should I give a W-9 to? This is an important question because I received numerous complaints from people who were asked to complete a W9 form. Basically, if you’ve done work for a business and they’ve paid you over $600 you should just hand them a completed W9. That was the instruction I was given by the IRS for my own company. You might think you’re not self-employed, or that you don’t have a business—but if you are doing work, getting paid, and not on the payroll; that means you’re self-employed.

When you look at the W9, the check boxes indicate if you’re an S Corp, C Corp, or sole proprietor. The instructions also recommend that sole proprietors use their social security numbers instead of EIN numbers. This is where I’m going to disagree with the IRS, in light of the huge number of identity theft cases this past year, do not use your social security number on your W9 form. Anybody can get an EIN number for their business. You can do it for free and it takes about 5 minutes at the IRS web-site: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-(EINs)-

When completing the EIN application, a sole proprietor is anyone who is filing a schedule C (self employed), E (rental real estate) or F (farm) for their business. It’s important to know that the minute the IRS issues the EIN number, it’s good. If you have to submit a W9 but don’t have an EIN, you can go online, get the EIN, and use it on your W9. The business issuing you a 1099 must accept your EIN even if you did the work a year ago.

Is there any way to avoid having to complete a W-9 form or issue a 1099MISC? The easy way to avoid having to issue a 1099 MISC (and collecting a W9 form) is to pay by credit card. Credit card companies are now issuing 1099K forms so that revenue to the vendor is already being reported to the IRS by another reporting agency. If you don’t want to be collecting W9 forms and issuing 1099s, then use your credit card. This is the easiest way to avoid 1099MISC and W9s, but remember that there are lots of fees associated with using credit cards. As my Mom used to say, “Pick your poison.”

What about home office expenses? Do I need to collect a W9 from my landlord? I think this is a case of the overzealous W9 collector. If you have a home office, you’re reporting that on your Form 8829. Whether you are reporting mortgage interest or apartment rent, it is considered to be a personal expense that you are attributing a percentage of to your business expenses. You do not need to collect W9s from your mortgage company, landlord, or utility companies to claim your home office deduction. (I’ve been asked this question enough times that I felt it necessary to include it here.)

What about purchasing an item from an individual? Do I need a W-9 then? The example that was given to me was buying a claw foot bathtub from Aunt Bertha. I tend to think of this kind of like going to a garage sale—you wouldn’t dream of giving a 1099 to the person running the garage sale would you? Now if Aunt Bertha were in the business of refurbishing bathrooms; that might be another story. But if you just buy something, a private transaction between two people, that’s not a W9 issue.

What about small jobs that are repeated monthly so the total will be over $600. Do I need to get a W-9 for those? Once again, if you’re talking about business expenses then you should collect a W9 and issue a 1099MISC for the work. For example: I used to pay $50 a week to a guy to edit my blog posts and monitor my website. (Now Mike does that.) Although the payment was only $50, over the course of a few months, it exceeded the $600 threshold so I had to issue a 1099.

Generally, if you’re unsure about needing a W9, it’s safer to err on the side of collecting one and issuing a 1099MISC than it is to not have it.

Tag: independent contractor

Getting a 1099MISC When You’re Not Self-Employed

What is a W-9 and Do I Need One?