The quick of it-
My employer sent me an unexpected 1099 (miscellaneous income tax
statement) a week before taxes were due because they had not filed the
internal "full-time employee" paperwork and had me on as a
"free-lance/contract employee". They have said they will cover the
additional taxes I will have to pay on the higher taxed 1099
paychecks. I took an extension on paying my taxes because I didn’t
think I should be responsible for being “out of pocket” due to their
tax error. I want to bill and receive payment from them before I send
in my check in to the IRS-

How much money due they owe me if I will have to pay taxes on
$15,750.00  at the higher 1099 tax rate?

---

Request for Question Clarification by jessamyn-ga on 14 May 2002 17:21 PDT

Hi -- I am not a tax expert but have been paying taxeson 1099 money
for the past six years. The short answer is that taxes on 1099 money
are approximately 25% of what you earned. However, you can take small
business deductions for expenses that you incurred while working as a
1099 employee. The answer will also depend on your tax bracket, as
well as your state of residence [you will be responsible for state
taxes as well as federal taxes]. So, my two clarifying questions are
1. what state do you live in? and 2. is the 15.7K that you are
referring to your entire income for last year?

Hi,

First I'll answer your question and then I'll give you some
unsolicited advice.

It is not technically correct that there is a 1090 tax rate and a
regular tax rate.  Here's the difference:

Typically, employees pay a Social Security of 6.2 percent (capping out
at $80,400 in wages) and a Medicare tax of 1.45 percent (those are
called FICA taxes) for a total of 7.65 percent.  That amount is also
matched by the employer.  During January 2002 employees were supposed
to receive a form that showed how much the employee has had deducted
from his/her pay.  When he/she pays taxes, he/she pays the difference
in taxes owed and the amount that had been deducted.

On the other hand, someone who is a contractor is considered
self-employed.  He/she pays not only his Social Security and Medicare
taxes, but also what his/her employer would have paid (although the
employer portion in effect counts as a business expense).  In other
words, a contractor pays 12.4 percent of his/her income (after
business expenses are deducted) for Social Security and 2.9 percent
for Medicare for a total of 15.3 percent. In January 2002, contractors
were to receive a form indicating how much they had been paid by the
contractee. When he/she pays taxes, he also pays the difference in
taxes owed and the amount that he/she has paid in advance.

So to answer your question, the amount extra you would pay on $15,750
would be $1,204.87 (7.65 percent of $15,750).  If you had a been an
employee with the same wages, you would pay $1,204.87 in FICA taxes
(probably through payroll deduction) and your employer would have
"invisibly" paid the same amount.  As a contractor, you pay both of
them.

Whatever other taxes you owe depends on your tax bracket, your other
income, your deductions, your tax credits and so on.  They aren't
affected by whether you're an employee or a contractor, although as a
contractor you can deduct certain expenses (such as some travel
expenses, some phone bills, and so on.)

Here's a chart that shows the tax rates:
http://www.planningtips.com/QuikGuide/2001ficarates.html

Note that the amounts above could be less if you had more than $80,400
in income during the year.

You should also be aware that if your employer now gives you $1,204.87
for your 2001 taxes, that amount would be taxable as income for the
current year of 2002.

And now for the unsolicited advice:

Either you are working as an employee or you are a contractor (there
are some limited circumstances under which you can be both, but
they're rare).  If you are an employee and your employer is treating
you as a contractor, your employer very well could be breaking the
law, and if you go along with this you could be violating the law as
well.

Numerous links on this Google search explain the difference:
://www.google.com/search?hl=es&ie=utf-8&oe=utf-8&q=%22employee+or+contractor%22

If your employer has been treating you like a contractor, it is
possible that your employer hasn't been making proper deductions for
you, and you could be having to make some major tax payments.

If your employer has been treating you like a contractor, it is also
possible that your employer hasn't been paying for worker's
compensation, unemployment insurance, and the like.

It is also possible benefits such as health insurance would be taxable
if you're a contractor.

All in all, if you're an employee but being treated like a contractor,
you could be getting ripped off.  There could be long-term
repercussions if you are injured on the job or later need unemployment
benefits.

I would strongly suggest you contact a tax expert and/or attorney
and/or union representative.  And if you can handle a fight with your
employer, I would suggest you INSIST that your employer give you a W-2
form, not a 1099, and pay its share of Social Security taxes properly,
if indeed you are an employee.  If your employer screwed up, it's
their problem.  Don't let it become yours.

End of unsolicited advice.

I hope this all works out for you.

Sincerely,

mvguy

Thank You!! Great answer and unsolicited advice

The "extra" amount your employer owes you, if the original contract
intended for you to be an employee rather than a 1099, is half of the
payroll tax (social security and medicare), or half of 15.3%, which is
the total government bite before regular income tax. A regular
empolyer witholds half of this amount(7.65%) from your pay, and pays
the other half as part of the overhead of having an employee. There is
no special tax bracket for the self-employed, your income tax burden
is dependant on your overall income. First year self-employed people
are exempted from making estimated tax payments, so it shouldn't
result in a penalty for you. The problem you will run into is that no
taxes were with-held for you as a 1099 employees, so that in addition
to the 7.65% your "employer" owes you, you will owe another 7.65%,
plus the income tax at whatever your bracket is. If you are in a high
income bracket, you could end up owing the government 50% of this
self-employed income. Expenses, or tax write-offs can lower this
somewhat, but they had to be incurred in the year you made the income,
it's too late to run out and buy a new computer and claim it as an
expense. An example of how tax write-offs affect 1099 filers can be
found at http//www.fonerbooks.com/account.htm - while the example is
specific to the computer business, it applies to all 1099 income.

Hi virtualprofessor.

I feel the need to add a little input here.  I am a contract employee
and had done my research before becoming one.  I made sure I had all
the legalities covered before I started.

Your employer can issue all the 1099s he wants but if the IRS
determines that you are a statutory employee (which would undoubtedly
occur if you only had the one employer during that time period and you
had no independent contractor agreement in place), your employer will
be assessed back penalties for not withholding the appropriate taxes
from your wages and for not properly reporting your wages during that
time period when those reports were due.

On your end, you could very well be penalized for not making estimated
tax payments when you should have on the income as it was made last
year.  Unless and until they determine that you are a statutory
employee and assess the penalties on your employer, you would bear the
penalty until the whole mess would be straightened out.

A big mistake you are making is filing an extension to "delay" your
payment to the IRS until your employer gives you a check.  Extensions
do not allow you to delay payment.  You must remit an estimated
payment (realistic) with your extension or you will be assessed late
fees and penalties.  The amount you owe will only get larger as more
time passes ...

It appears that your employer is being very dishonest no matter how
you look at it.  They obviously did not do what they were suppose to
do and they even sent you the 1099 very late (deadline to get 1099s
and W-2s to recipients is 1/31).  If you were a statutory employee,
you need to fight that and not help cover up your employer's mistake -
you will end up being the injured party in the long run.

There is quite a bit involved with these issues, and I strongly
recommend that you consult with a tax professional ASAP ...

-Tracker-

Virtualprofessor --

Here's the proper -- and most straightforward -- way for your employer
to rectify your situation:

They need to file amended W-3 (to add the extra income to your W-2)
and 1096 (to delete the inaccurate 1099) forms with the IRS and your
state. (Their accountant or CPA will know what that means.)

You will received from them a *corrected* W-2 (with the "corrected"
box checked); you won't need the 1099. This is the one you should use
for your tax returns. To help make things less confusing when you file
your returns, ask your employer to write a short note on their
letterhead explaining the error and the reason for the correction.
Attach a copy of this letter to the back of your state and federal
returns. That way, there's no confusion when you file *your* tax
returns.

You are going to have to pay the taxes, but this way you pay less back
to the employer (this money would normally be deducted from your
paycheck, and they'll forward it to the state and IRS as usual),
rather than the additional self-employment and (possibly) a late
penalty for not paying the taxes in the quarter they were due. Unless
... you can convince your employer to pay the withholding taxes,
Medicare and Social Security for you without you needing to give the
money back to them.

Captvatng1