Tax Consequences of 1099 Employment Status

[HighFlyer]

I'm getting ready to start a new job. Employer tells me I'm going to be 1099. After asking around a bit I find out that I'm going to be an independent contractor, they take no taxes out, I'm responsible for it. I'm sure there's more to it? I'm kind of skeptical and nervous about it, because I can see where I can get into some pretty hot water if I'm not careful, and quite frankly, I have no clue what I'm doing. Someone said I should start my own corporation and have my employer pay my corporation and then I pay myself through my corporation (sounds confusing to me). Then my employer begins rambling on about how great 1099 would be for me, how I can write everything off, a lot more than if I wasn't 1099. Said I can purchase a new vehicle, say it's for work and write off the entire purchase? $30,000 write off? Really?

Alright, my first questions are these:

1. Should I set up a corporation if I'm going to be 1099, or just have them pay me directly? (I don't know if amount made through my employer makes a difference in doing this, I should be making roughly 120k a year)

2. Can everything really be written off? Is there a list of things that can be written off somewhere? (I also work in a state different than the one I have residency in, if that means anything).

3. Should I hire an accountant to take care of financials for me, including taxes and such? Are accountants expensive?

I can still back out of the job, I have a few more days before I have to really commit, and I'm rather hesitant to take the job, mainly because the whole 1099 things worries me and I have no clue what the hell it means in the long run or what I'm doing and the owner just says "it's much better, trust me"

[flyingron]

1. No, a corporation isn't of any use here and is going to be a big headache in the long run (How much depends on what state you are in, thank you for removing that piece of information).
2. You can write off ordinary and necessary business expense. You can find information here http://www.irs.gov/publications/p535/index.html
3. If you have no clue, a tax professional certainly can help. First thing you should do is keep contemporaneous records. Everything that might be a business expense either have a receipt for it, or make a record (get a little expense notebook you can find them at Staples), and record it AS YOU SPEND IT. You'll need to also keep track of your income and make the quarterly estimated tax.


I suspect highly however that you are being ILLEGALLY CLASSIFIED as an independent contractor. Read this http://www.irs.gov/businesses/small/...=99921,00.html
It has links as to what to do about the estimated tax even if you are a legitimate contractor.

"It's better" applies mostly to him. It dodges his responsibility to legally pay the employers share of the social security taxes and probably gets him out of doing other things he has to do for legitimate employers like having the appropriate insurance, workman's comp, and unemployment coverage in place.

[SChinFChin]

I agree with all that "flyinron" said.

I'm in charge of finances for our senior center, and ALL of our excercise intructors, muscians, entertainers we hire are classified as consultants, and they are ALL 1099 people. The regular staff though are all W2's.

There is an issue of classification, and legally performers can be classified as 1099's with no problems. The IRS has guidelines as to who can be 1099, and who should be W2, though the line is blurry, and many employers like to hire people as 1099's. When I had my business, I do mechanics as 1099's for short while, and when they work out, I put them on the payroll. I have more complications with mechanics if I put them on the payroll first, then find out they mess up my customer's cars, then I have to fire them, and have issues with "unemployment insurance", though I've been told there are guidelines for firing incompetents during a trial period.

However, what a 1099 means is he doesn't take deductions out for FICA, medicare, federal, state and local taxes. When you do your own taxes, you file a schedule C, and you then pay all of that yourself, FICA and medicare as self employment tax, plus all the other Federal and State taxes. If you can manage to figure all that out, it should be OK, though your'e better off using an accountant if you are not sure.

As all of our entertainers are on 1099, what that means is we send a 1099 each year to te IRS telling the IRS what we paid them, with a copy to them, then they do their schedule C's. And each year I have a few of them coming back to me saying they forgot to include the income because I didn't give them a 1099, though we did, possibly lost in the mail, or in some other cases, they report an income different than what we have.

Though you have a choice of backing out, I was doing some part time consulting work at a company, and one guy finally gave in, took the job as 1099. He had a few job offers that he turned down, as he preferred a W2 position, but finally took the job because he needed one, and all it is he finally realized he has to set money aside to pay his employment taxes. It is entirely a personal question between you and your employer, and if you want to fight the employer. But you don't get unemployment, workman's comp, disability etc as a 1099.

There is no need to form a corp., as it would bring up more complexities.

[Bubba Jimmy]

The "employer" saves the payroll taxes, state unemployment taxes and worker's compensation premiums. So, you should negotiate a higher rate of pay to compensate for these things, which you'll have to provide for yourself.

I do a great deal of pro bono work for people who have been misclassified as independent contractors when they should have been employees. You see, a company cannot just decide this. The law determines this based on the circumstances under which the work is performed. There is no one test that makes the determination definitively, but some things are certain. A person performing the same job under the same work conditions cannot be both a 1099 independent contractor AND a W-2 employee. And if you have two people doing identical jobs under identical circumstances it cannot be the case that one is an employee and the other an independent contractor. When the IRS determines that a compnay has misclassified workers (which is abusive of the worker, in my opinion) it can be quite expensive for the company.