Employee or Independent Contractor or... both?

Discussion in 'Growing and Managing a Business' started by Rikaelus, May 22, 2013.

  1. Rikaelus

    Rikaelus
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    So I'm currently working on two contracts.

    One contract is via a consulting agency that treats me as an employee.
    The other contract is direct and they pay me via 1099's.

    I know the latter income will require me to handle my own taxes quarterly, but besides that:

    - If the IRS asks what I am, do I pick one or the other? Does one take precedence? Is there room for both?

    - What can I write off my taxes? Health insurance? My cell phone? A laptop used strictly for one job or both? If I fall under two categories at the same time, how do I write off things that are applicable to both jobs?

    Or an external resource is fine, too. So far I've been able to find plenty for independent contractors, but not a lot of good information for people having a job, also.

    Thanks
     
  2. ArcSine

    ArcSine
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    In all such questions, it's helpful to remember that the answers (particularly the way IRS looks at 'em) are always specific to the particular income being earned. And, as in your case, if there are multiple "types" of income, the questions will have different answers for each. For example,

    • Indep contractor or employee? You are both, and so if someone asks which you are, they'll first have to clarify which particular contract they're asking about.

    • As with the IC vs employee question, how you treat or deduct any given expense depends on which activity it's directly traceable to; the rules for deducting certain expenses are different for an independent than for an employee. For any expense that's reasonably allocable to both activities you'll usually need to make a reasonable allocation, and then deduct the two pieces separately (one portion from your IC income, one from your employee income).

    • On the previous point, note that a three-way split may be required, in some cases. An automobile you use for both contracts as well as for personal errands will need to be allocated between personal (nondeductible), Contract 1, and Contract 2. This allocation would most likely be based on your mileage logs. Note also that automobile expenses have different deductibility rules for independents than for employees, and so each portion would need to be treated appropriately.

    IRS has a couple of publications that might be of help. Publications 334 and 535 (Tax Guide For Small Business; Business Expenses, respectively) will give you some guidance on deducting expenses attributable to your independent contractor income.

    Then, Pub 463 (Travel, Entertainment, Auto) will provide some guidance on how you'd handle certain expenses (particularly travel and auto) as an employee, to the extent that some portion of your expenses are allocable thereto. Also see Pub 529 (Miscellaneous Deductions), the section starting on page 2 called Unreimbursed Employee Expenses. This will give you more direction on handling expenses attributable to your employee income. You'll find it's pretty limited, compared to how you can deduct expenses against your independent cont. income.

    ....or, having downed your last Advil and muttering several expletives at ol' ArcSine for having put you on this library of thrilling reading, you could try an approach that works for many. Drop a little coin for one of those inexpensive do-it-yourself tax return programs, such as TurboTax or H&RBlock At Home. Every Office Max, Staples, Office Depot, WalMart, ... has 'em; just be sure to get the version that accommodates self-employed situations. Starting at the top, the program will take you through a series of questions, Q & A style, with you filling in the answers along the way. By the end, the program should have all your numbers in place, on the correct forms, such that you see your bottom line straight away.

    You could pick up a copy of a 2012 program today, go through the Q & A session but answering the questions with your estimates of what your numbers (income, deductions, business expenses, mileage, charitable contributions, etc.) will likely be for 2013, and when you're done the resulting tax return the program spits out---although it says "2012" at the top, of course---should be a pretty good forecast of what your actual 2013 return will be. You can then plan accordingly, such as deciding on whether you need to make some quarterly estimated payments sometime during the second half of this year.

    Suppose further that three-four months from now, 2013 isn't playing out quite the way you thought when you originally answered the program's questions back here in May and created that dummy '13 forecast return (income looks like it'll be higher, mileage won't be quite as much, e.g.). Here's where it gets cool: just go back into that saved program, tweak the numbers accordingly, and see immediately how the bottom line changes. You could then revise your final quarterly estimate installment payment accordingly, to avoid either an excessive balance due or refund, when you file your actual 2013 return in spring '14.

    Best of luck with it, and congrats on the contacts.
     
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  3. Rikaelus

    Rikaelus
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    Nice data dump. They should make that a sticky somewhere...

    I've used H&R Block Online for the past few years, just for normal joint filing, so I'll see what I can mock up there. Pretty sure self-employment stuff is the next plan up, but no biggy--I don't think they charge until you go to file, anyway. I'm worried it'll start tripping me up, though. I've had enough trouble accounting for my wife's Indian Gaming income and the fact that doesn't get taxed right through the year. Splitting things up further... bleh.

    If H&R Block doesn't pan out I'll probably pay to see a tax attorney, at least to get a succinct to-do list specifically for my situation.

    Anyhow, thanks for the info. I'll definitely be referring to your post for a while!
     
  4. Rachel S

    Rachel S
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    It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.
    Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

    Thank you :)

    Rachel !!!
     

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