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FI is a laborer/driver. (18 wheeler) he works for.. lets call him R. FI has always been considered R's employee but the other day we were at his house and he says he wents to get his taxes from last year done (yeah, way late) and the tax guy was telling him (R) that since FI was an employee they had to pay all sorts of taxes on him, so now in order to avoid that R eeds him (FI) to sign something saying that he is an independent contrator and NOT an employee.
My mom and sister both said to look into it to make sure we aren't going to get screwed with this whole situation.
I tried to yahoo search it, and I mean...I guess I KIND OF understand the difference. But it would be much easier if there was someone who knew more about it and could answer to my specific situation.
you probably will get screwed if he signs saying he's an independent contractor. a friend went through this where his employer didn't count him as an employee (to forgo the taxes as well) and said friend had to then pay an assload of money since he was considered an independent contractor. it REALLY sucked. it was like a really debilitating amount in his case.
@elliestan: you know, that is what I was thinking.
I feel like they are trying to take advantage of us. They have been in the business longer than we have.. so.. they kind of know how (tax) stuff works better than us.
Also, when I looked it up online, it was saying something about when you are an employee the person hiring you dictates how exactly you do things, how long it takes, etc. Which is what the situation is here. Lance doesn't decide the how and when, he just does what he is told.
@misskarianne: yeah, i'm sure i'm incorrect saying you'll probably get screwed but honestly flags just went up in my head remembering my friend's ordeal. i don't remember the details, but maybe it's something like the taxes that the company would/should be paying get passed on to the so called Independent Contractor? either way i'd be really wary and not sign if at all possible. if they try to coerce him into signing then i'm sure there'd be something illegal going on there!
I was in this same situation as a graphic designer... the company i was 'employed' by didn't want to pay taxes on me so I was hired as an independent contractor.. but when it came time to pay taxes I was royally screwed. Normally your employer pays 10% of your taxes (I believe) and you pay 15% but as an independent contractor you pay the full 25%. And since I used their computer, office, etc. I had ZERO deductions that you would normally have if you actually were an independent contractor. Does he own the 18-wheeler that he would have deductions?
If he does sign it... make sure to save all receipts for anything he could expense as a business owner. And save 25% of each check for quarterly taxes that he will have to pay in.
It depends on the state, I believe, but FI has done contracting in the past. You are responsible for withholding your own income tax so if you don't put it away (in savings or something) throughout the year you'll be slammed with owing a ton and scrambling to come up with it when tax time comes. You also don't have the same benefits or protections as a full time employee would. I don't think I'd do it in your FI's situation.
The independent contractor classification is a VERY hot topic right now with the IRS.
The general rule is that an individual is an independent contractor if the payer (employer) has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. If you are an independent contractor, you are self-employed.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Medicare and Social Security Taxes for Self-Employed but rather will be subject to taxes as an "employee."
The IRS website has more information about the tax implications of the classification.
R IS and independent contractor. Him and his wife have a "business". Like... he works out of his truck basically.
FI doesn't have his own tractor trailer, he runs with R. He JUST got his CDL license Oct. 30th. So before that he was basically just labor for R. Permanent Help. Whatever you'd like to call him. We don't have a business name and I havn't done any paperwork for it (which I will start at the begining of the year probably.. like a DBA)
I'm not sure if I want him to sign but R's wife said "if he doesnt sign he's fired" and then they will probably make is so the company that R works for won't hire him on like they planned on. Because thats how they are.
You'll get screwed. Your FI will have to pay twice as much in payroll taxes instead of having his employer pay them, and he'll have less protection if he's laid off or injured at work. Don't sign it. If he's an employee, it's not legal to classify him as an independent contractor.
@mkendrick: I was on the IRS website and thats where I was KIND OF understanding what was going on.
It sounds like FI is and Employee by those definitions. I mean... if R is telling him what to unload/load and all that.. isn't that controling the result?
Or is the fact that FI knows what he has to do and does it make him a independent contractor?
I'm so confused.
@spaniel: they said something about how FI is still covered under workmans comp or something
My boss emailed someone from our HQ that she knows and asked the difference he gave this explanation:
"If you are an independent contractor the employer pays you a flat fee or a rate per hour and no taxes are withheld. But, this means that you do not qualify for benefits and you have to pay employee and employer taxes on your earnings every quarter. And, you’ll need to file a separate Schedule C every year as an independent contractor. "
By THIS definition FI is a independent contractor. He gets paid a flat rate each week and no taxes are taken out.
But then it says no benefits... including workmans comp?
Does this mean I was suppose to be paying taxes quarterly!? If that is the case I messed up last years taxes.
Workmen's comp, at least as far as I can tell, only applies to employees. Independent contractors have to go through a different process.
You don't have to pay quarterly taxes, I believe you can pay them in one lump sum at the end of the year.
Sheesh I feel like your FI is being majorly ripped off. They're making him sign something illegally and then threatening to fire him if he doesn't sign. Surely there's someone he can report this to?
Is there any way he can look for a different job? 25% taxes would be a hard pill to swallow unless you were making a super high salary that landed you in that tax bracket.
I feel like ever since he decided to go back on the road we have been being ripped off. Frankly.. the whole situation is pissing me off. They walk all over FI and I can't say anything because they prob. would fire him on the spot and ruin his chances of getting a better job. Also, I am sure I could report it to SOMEONE. I feel like they are all about getting THEIR money no matter who they walk over to get it (including the IRS) Its just some shady business that I can't wait to get out of.
He already has a job lined up at the moving company that R "works" for. They've been telling him for months they want him to haul for them. I am just afraid that R's wife will talk R into talking some crap about FI and it will ruin his chances of getting (er.. well.. KEEPING) the job they are offering.
I just keep telling myself only a couple more months of dealing with this and then we are on our own. Seriously, every.single.day. Thats whats going through my mind.
and is that 25% of what he made this year? ON TOP of normal taxes?
If 'R' is threatening to fire your FI if he does not agree to become an independent subcontractor, he needs to contact the Dept of Labor in your area and report it. This doesn't mean he won't be fired or might not get a bad reputation, but it's frowned up (if not downright illegal) for an employer to evade taxes by claiming an employee is an independent subcontractor.
It does not sound like your FI passes the test for being an idependent subcontractor (since he's not in charge of how or where he does the bulk of his work).
Now, should he decide to sign (what I can only surmise is a W-9 form, basically stating his name, address & SSN so that 'R' can give him a 1099 at the end of the year instead of a W-2) and agree to this, he does not have to have a business name (that's what Sole Proprietor is for) but he will have to figure and file self-employement taxes, perhaps on a quarterly basis, depending on his expected income. The best practice for this is to put 1/3 of his income into a savings account and pay taxes from that. He will be responsible for state (if applicable) and federal income taxes as well as FICA taxes.
The bit about Worker's Comp is true, provided 'R' doesn't take the next step and require your FI to get an exemption from the state (usually available to builders/contractors, not sure about drivers), 'R' will still have to cover him on the company Worker's Comp policy.
I own a small business. I only use independent contractors - I only need people if I need a sub (I own a fitness franchise) and I can't teach the classes myself. I take no taxes out for the person I am paying. I have no insurance for them (liability or health insurance). If someone gets hurt when they are teaching, they need to file it with their insurance company. I file a 1099 form with the IRS every January for every independent contractor.
You will have to file a seperate form in which this income when be reported. Yes, be prepared to start taking money out now or pay estimated quarterly taxes.
It is the employers choice to use independent contractors. If he doesn't want to be one, "R"'s wife has a valid reason to let him go. Your FI is considered a subcontractor to "R"'s company.
They can tell him what to unload. It is his choice if he wants to do it or not. "R" can't make him. But he won't get paid either. For example, if I know I will be out on Wed. I send an email to the qualified people who can teach class. Someone steps up. I can't force them. Say Sally respnds and teaches the class. Sally gets paid. Debbie did not respond. No bad blood between me and Debbie - she just doesn't get the work.
@misskarianne: i would look into any reporting avenues possible. i'd contact the IRS. maybe start here? http://www.irs.gov/compliance/enforcement/article/0,,id=121259,00.html or here? http://www.irs.gov/individuals/article/0,,id=106778,00.html
if he truly should be listed as an employee maybe their actions would be considered tax fraud or tax evasion, i don't know.
does he know the company that R works for personally? is there any way for him to talk to anyone there about a job? i'd document anything you can right now, especially about their threats, i'm sure that the moving company would take you FH's side in the event he gets fired over this if they knew of R's snakey tactics.
I can shed some light on this.
I was working for a company and moved out of state with my FI. In order to maintain my employment, I had to switch to contractor status and I set up my own LLC, or company. The company I have a contract with pays me when I invoice them (biweekly) and reimburses my travel expenses. I can deduct anything I purchase for business at my home office (furniture, office equipment, a portion of our utilities, etc) on my taxes. I however, am NOT their employee so I fulfill my obligations which are outlined specifically in my contract, but I pick how I do my hours and my work.
What type of contract does your FI have with this employer? Would you like me to take a look at it? I negotiated a MUCH higher hourly rate consulting and I save 30% per invoice for taxes, and these are paid quarterly.
My FI has also been a contractor in the past, so I am very familiar with the tax structure as well as contracts and this explanation could go on forever, the bottom line is that:
What your fi's employer is doing is illegal. If he signs it, not only can he not receive workman's comp, he can no longer get unemployment if he were laid off through no fault of his own. Tell him NOT to sign this paper. He can report his employer to the IRS as a last resort, but he needs to start looking for a new job, like yesterday.
Technically it was R's wife that was threatening the firing, but R will go along with whatever she says.
okay, is it possible for him to already be getting a 1099 and not be an independent contractor? Because thats what he has been getting. R's wife said that after he signs whatever they want him to we will get a different form (cant remember what it is off the top of my head right now) and she said we will have to file a 1040 long form instead of a 1040 EZ.
Wow. I really feel like we are in it deep right now, and are just going to get screwed either way. Like I haven't been doing this right from the get go anyway. Sheesh. Maybe I should just get it over with and thank goodness it's only happening this first year. I guess from now on I will be ready for it?
@spaniel: Not necessarily. I handle all that paperwork for my office and if we have an independent subcontractor that does work on our premises that is not covered by their own policy, we have to include those fees in our policy that month and pay the applicable premiums.
@PinkMagnolia: Quarterly self-employment taxes are required if you're expecting to owe over a certain amount in a year ($1000 or $1250 if I recall correctly--it's been a couple years since I had to file them for myself).
@misskarianne: 25% is a good ball-park of what a self-employed person pays. Federal income taxes depend on your annual income minus any deductions you can claim. But FICA (Med & SS) come to about 15.3% of your gross pay. Employers pay half and the employee gets the other half (well, minus the 2% that was this year's tax relief), but a self-employed person has to pay both parts. I'm not sure what "normal" taxes those would be on top of though, those ARE the normal taxes.
How long has he been employed with "R"? If he has been getting a 1099 they have been paying his as a contractor all along, however does he have an actual contract, and if so, what are the terms?
If he got a 1099 last year, how did he do his taxes?
@Sunflower--girl: So if he already is a independent contractor, why all this crap with the tax man saying that he isn't. I'm sure R and his wife told tax guy that FI gets a 1099. Not sure why now all of a sudden they have to have FI sign something.
I am not sure if this makes a difference, but with your example you have ppl that come in just when you need them. FI works with R all week, every week. Every friday he gets paid a flat rate. It has been like this since he started with him.
@BusinessBride: Just another thing that probably makes this worse. We have no contract. R is something FI has known since.. jeeze... since he was younger. His dad and R are friends. So I don't think we have much ground to stand on here. It will just be a he-said, she-said thing.
@misskarianne: If 'R' has been withholding the necessary taxes from his employee's pay, he should be sending out W-2s at the end of the year showing gross wages and the various amounts withheld. 1099s are used for independent subcontractors and other incomes, depending on type (gambling earnings, interest, etc. all get reported on different versions of the 1099 form).
Ok well he is techincally in contractor status and has been the entire time, so now you need to:
A. Get your taxes straight and B. Ask for a contract with defined terms and conditions
Also, regardless if he is a family friend.etc. it does not matter. Your Fi needs a contract and to start tracking his expenses so you can get every deduction possible. He needs to count on paying 30% of his gross wages (pre-deductions).
@BusinessBride: The more we get into this the more it seems like he really is already an independent contractor. I dont understand why there is all of this crap now (all of a sudden).
I did his taxes for him last year, using turbo tax. If I remember correctly, he didnt get anything back and we did have to pay in. Which I had expected.
@thirdtimebride: R hasn't been holding any taxes at all.
@BusinessBride: Do I need to re-do his taxes from last year? Or just start when I file this coming up Feb? I didn't do any deductions last year, although I could have. He wasn't great at saving reciepts. This year is much better and he gives me reciepts every time he gets home.
As far as a contract goes, is there a point if Lance is going out on his own at the begining of the year?
Yes, if you paid taxes to the Fed and the State last year then you are probably covered and if you expect the same this year and have planned for it, you will be just fine. R had probably not documented everything correctly and that is why he is bringing this up now. I still seriously envourage your Fi to get a contract in place. That way if he starts tracking all of his deductions so you guys can get a break on taxes and pay less, if the IRS ever needs verification or audits him, he has all of the documented information to support his tax returns.
Oops sorry a bit late. You do not need to redo your taxes from last year. Just start this upcoming year. If he is going out on his own Starting Jan 1st, that is when he needs to be diligent about expenses, and make sure he signs a contract with anyone he does work for/vice versa. Even if it is a ten day contract, get one every time!
when he starts with the actual company as an actual independent contractor, I am sure he will have a contract with that company. (very large moving company)
Is there any reason to have one for the next month and a half?
I'm afraid if I start asking for stuff like this they will cut ties with him. Which perhaps we would be better off, but its just not a good time for him to be unemployed all of a sudden.
just saw your other response.
Thank you SO MUCH for all of your help!!
Nope, he should be fine for the next 1.5 months and you are A-OK tax wise. I think the major alarm was that I/Other Bees assumed you had not known that you would OWE taxes, and when people siwtch statuses and don't save any money to cover their tax bill, can be pretty shocking!
Right. I know we will owe taxes. That I have always known. Save reciepts and get all your deductions! And hopefully it wont be too bad! Lol
I guess that still leaves me wondering about what this form is she wants him to sign... And what effect it will have on us. Or why we even have to sign anything when he's already an independent contractor.
Honestly, it will not have any effect based on the description you have provided. You should be A-OK.
I hope so. I might come back to this thread once I find out the names of those forms she is talking about.
@misskarianne: I also work full time. I am a contractor there too. Again, same thing. They do not tell me work hours. I do not have insurance. I do not get reviews. I have things I need to get done that I agree to do. I bill every week. It doesn't matter if I worked 10 hours or 100 hours. They pay for the completed work. Tax guy is playing CYA. Like someone said before, this is a sensitive area.
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