Self-Employment Tax Question?

Tamatha Neubaum: The Virginia tax rate depends on earnings. I typed in Virginia income tax percentage and lo and behold a site came up and said tax rates and I clicked and there it was. You did not look very hard.

Jacques Teri: If she's being hired as an "Independent Contractor" that means the employer is not going to withhold any taxes for Federal Income Tax, Social Security, Medicare, or State Income Tax and instead of receiving a W-2 at the end of the year she will receive a 1099-MISC with the total wages earned for the hours she worked sitting in Box 7 (Non-Employee Compensation) and must file a Schedule-C for self-employment.Before proceeding lets get the "percentages" out of the way... A single individual between the ages of 18 and 25, that is NOT a full-time student, has NO children, and is projected to make $3,900+ for the year (under the current rules) would file Federal Form W-4 and Virginia Form VA-4 as "Single & 1" (unmarried with 1 exemption to withhold! ings) with their employer's human resource office. Such individuals will have roughly 10% of there income withheld for Federal Income Tax (in Box 2 of their W-2) and roughly 5% of their income withheld for Virginia State Income Tax (Box 17 of their W-2) at tax time.These percentages (assuming the person only works 1 job the entire year) are enough to cover the Federal and Virginia Income Taxes and they will be close to the "break-even" point when they file with a refund (or balance due) of less than $100 of the Zero-mark... assuming they have no other sources of income, credits, or deductions.If your sibling knows for sure she will be receiving a 1099-MISC instead of a W-2 then she must track all of her Out-of-Pocket (OOP) expenses including her TOTAL vehicle mileage (every mile she puts on her car driving to/from home, doctors, movies, food lion, Walmart, etc. and NOT just the miles related to her job) and record each trip in a vehicle log. Any expenses she pays out of poc! ket for her job are put on the Schedule-C and subtracted from ! the income paid showing on the 1099-MISC form. When you're self-employed the IRS only wants you to pay taxes on your PROFITS, which is your total payments received - your expenses. The details for tracking income and expenses are covered in IRS Publication 334: Tax Guide for Small Businesses (For individuals who file Schedule C or C-EZ).Lets assume she works exactly 20 hours/week for 50 weeks (52 weeks/year - 2 weeks for vacation) and the pay is exactly $8/hour with no increases. She will make $8000 ($8/hour * 20hrs/week * 50wks/year = $8,000) for the entire year BEFORE subtracting out her expenses. If she has NO expenses to put on her Schedule-C (because her employer provides all tools/equipment and reimburses her for all travel/vehicle expenses) then ALL of the income on the 1099-MISC will be taxable along with the wages from her husband's job.If your sister wants to play it safe and avoid the chance of owing the IRS or Virginia then she can make Estimated Tax payments by! sending a check (for 10% of her earnings that quarter) to the IRS along with Federal Form 1040-ES payment voucher and a second check (for 5% of her earnings that quarter) to the state along with Virginia Form 760-ES payment voucher. Three payments are made during the actual tax year and the "fourth" is paid when you file during tax time. The dates these payments must be made are in the instructions for both the Federal and Virginia forms. You can search IRS.gov for "Form 1040-ES instructions" and search Tax.Virginia.gov for "Form 760-ES instructions" to find them.Something to be aware of, especially if your sister and her husband use a professional tax preparer to file their taxes, their fees will be higher because of the Schedule-C form needed for the self-employment. Places like Jackson Hewitt, Liberty, and H&R Block will add AT LEAST $100 for the Schedule-C form.Before your sister and husband go thinking they can just "leave off" the self-employment income and avoid fil! ing a Schedule-C to avoid the fee. The IRS receives a copy of the 1099-! MISC (just like they receive a copy of W-2's) from the employer, so they will know she made that money and expect her to pay taxes on it. If there is no Schedule-C filed they will send a letter and calculate the taxes based on the FULL AMOUNT since they have no idea what expenses she actually has to subtract out.In case your wondering... Employers resort to hiring "independent contractors" and issuing 1099-MISC forms in order to save money since they are not required to pay the employer portion of Social Security and Medicare taxes in this case. If the company paid $8,000 to your sister as previously calculated they actually save $612 ($496 for the 6.2% in Social Security taxes + $116 for the 1.45% Medicare taxes) issuing a 1099-MISC instead of a W-2 form.Also, one final note: Sometimes instead of Box 7 "Nonemployee Compensation" employers will put the pay in Box 3 "Other Income" on the 1099-MISC form. An inexperienced tax professional may think the income can simply go on ! Form 1040 Line 21 and not require the Schedule-C form. This is wrong for 6 reasons:1) Your sister is being paid for work/service for tasks/projects while not on the employee payroll of a company. She is considered self-employed under IRS rules and must file a Schedule-C form to report all income and expenses.2) You cannot simply subtract out the expenses from the amounts on the 1099-MISC and put the difference on Form 1040 Line 21. The IRS is looking for either the full amount to be reflected in the AGI or a Schedule-C with the listed expenses to justify the reduction to the expected AGI they have calculated.3) Without a Schedule-C and its accompanying Schedule SE you cannot benefit from the Deductible Portion of Self-Employment Tax (Form 1040 Line 27) which actually reduces your AGI & be extension your Taxable Income to pay less taxes.4) If your sister is paying out-of-pocket for health insurance and is not covered by an employer or her husband's employer plan. She must fi! le a Schedule-C in order to write off those insurance premiums with the! Self -Employed Health Insurance Deduction (Form 1040 Line 29) and again reduce the AGI/Taxable Income and pay less taxes.5) In the event your sister had more (OOP and/or vehicle) expenses to do the work than what she actually got paid by the employer. She must file a Schedule-C to deduct that business loss and lower the AGI/Taxable Income and pay less taxes.6) Any taxable income (profit) from Self-Employment COUNTS toward the Earned Income Credit along with income from W-2s, but it has to be reported on the Schedule-C in order to do so. Be advised ALL related expenses MUST also be reported under IRS rules. This is to ensure that people do not try to game the EIC rules to get back more money than they should. Failing to report business expenses on the Schedule-C is considered a fraudulent act.Bottom Line: Your sister's life will be much easier if the company treated her as a "real employee" (with a W-2) instead of an "Independent Contractor" (with a 1099-MISC) issued to her! at the end of the year....Show more

Gene Debell: Her federal tax has two components, self employment tax (for social security and medicare) plus income tax. The SE tax, actually works out to about 14% - it's 15.3% of 92.35% of the payments she gets minus allowable business expenses. This is not affected by her husband's income.Both federal and state INCOME tax are affected by her husband's income. Since you don't give that, no way to answer the rest of your question. If he has an average type income, a good guess for the total additional tax they'd pay for her working is around 34% of her income....Show more

Brittney Inabnit: By "total state and federal self-employment income tax liability," I mean percentage-wise, not the actual amount of money. Thank you!

Hilma Pestano: Taxes for self-employed individuals are far more complex than most people realize. Questions concerning deductions and proper procedure undoubtedly arise, especially during the firs! t few years of filing a Schedule C. Here are answers to five common tax! questions for those who are self-employed.

Antonia Quinnett: have her find a library as she is going to get shafted.if she is 'working' 20 hr week at 8$ an hour,she is Not an independent contractor.have her contact her state's labor laws sites as well as IRS.gov to learn b4 she gets burned.countys are not allow to tax incomes.visit any of dozens sites that figure with out herinfo, payroll taxes.have her use a library to learn about "self employment'b4 working with the company.she probalbly is an "employee" falesly classified....Show more

Madge Voice: Rob: Thank you very much for the warning - I can see this is not a good idea!Judy: I REALLY appreciate the numbers - thank you!Cathi: My mad Google skills must have failed me. Thanks for the comment though ;-)

Kirk Coolbeth: The income tax rate is not 15.3%.15.3% is the federal self-employment tax rate, which is in addition to federal income tax. For example, if her income tax rate was 10%, then the federal! government would get a total of approximately 25%. The federal government gets 15.3% (which is not income tax) plus whatever the income tax is.There is no one fixed rate for income tax. It can be 0%, 10%, 15%, 25%, or any other number, depending on the total amount of income that the person has. If she is filing jointly, then the rate depends on the total of her income plus his income....Show more