My daughter just did her taxes, and found that she owes over $500 in self-employment taxes because the job she did last summer for United Way was paid as if she were an independent contractor. I’m in HR myself and understand the rules about who can and can’t be considered an independent contractor in a business or typical non-profit setting. Is there some sort of safe haven that would allow United Way to do this?
Some of the people doing the same function are Americorp volunteers, and some are whatever they classified her as. She feels they take advantage of the naivete of high school and college students in not explaining the drawbacks of this pay scheme. She wouldn’t have done it if she had known. And I would have advised her not to as well, as she wouldn’t have been covered by workers compensation if she had been injured, etc.
She’s gotten advice from friends who are accountants. They’ve told her to file and pay the self-employment tax, and then file an amended return explaining that she isn’t self-employed and should have been classified as an employee. This apparently to get her out of having to pay fines or penalties of some sort.
This happens every year to students and not just by non profits. Landscaping companies, painting companies, and knife selling companies do it. I understand that the students had no idea but aren’t the parents paying attention? If your child earns $8/hour and works 10 hours and brings home $80 in a check with no pay check stub, what did the parents think would happen? I try to warn my clients with teens approaching that age to be wary of companies taking advantage of kids. That knife company, that shall remain nameless, even goes so far as to tell the kids they can write off all kinds of stuff so it won’t be taxable.
The only way out is to report the company and hope the IRS does something about it, but from my experience, they won’t. It will be a learning experience.
Aren’t you allowed a certain amount of 1099 income for free? It used to be 600-dollars back when I did occasional freelance jobs but that was awhile ago.
It probably depends on what her job was and how/where she performed it. I can see a lot of part-time, temporary jobs qualifying as independent contractors, depending on job function, especially in the nonprofit world. My kids both had contract positions at various times in school and are well aware of the tax consequences – though I think in hindsight there is some educational value in that as well. At least by the time they graduated they knew how to complete a Schedule C or C-EZ and to account for the shortfall.
The only fines or penalties that would be possible, would be if she should have been paying estimated taxes quarterly. But I’ve never known anyone who got hit with that when it was a temp job or the first time that they had that kind of job. Often student types have other jobs where something is withheld during the year that they would have got back after filing their tax returns, but now don’t because of the SE taxes that are owed, so it all ends up being OK.
Truly, she was badly advised when she was hired. It was unfortunate that they didn’t tell her that she’d be responsible for her taxes, and that at she should at least make certain that she saved at least 25% of whatever she was making so that she’d have the money in the bank for state and federal taxes come spring.
Yes, tell your kids about the difference between being an employee versus an independent contractor. The quick way to tell is that an employee’s pay check will have a pay stub that will show deductions for payroll taxes (even if the pay level is too low for income taxes) and possibly income taxes and other things, while an independent contractor will be paid the full amount with no deductions (and thus responsible for accounting and paying all income and payroll taxes instead of having much of it automatically deducted and paid). At the end of the year, employees get W-2 forms while independent contractors get 1099 forms.
Of course, the legalities of who should be an employee versus independent contractor are another topic that this brings up. As a practical matter, independent contractor pay should be higher than an employee’s pay, to account for some additional taxes (“employer’s half” of Social Security and Medicare taxes, for example), plus whatever benefits that employees may get (the value of benefits can be substantial if they include such things as medical insurance and long term disability insurance).
The company is not required to issue a 1099 if under $600 but that doesn’t mean the employee is not required to pay tax on it. And if this student owes $500 in self employment tax than the income was certainly over $600. You have to file for, and pay, self employment tax when the income exceeds $400. And that’s not per 1099 but total self employment income.
If you are hired, and not asked to fill out a W-4 and then when you get paid it’s either in cash, or in a check that totals the amount you should get paid, then you are being considered an outside contractor and not an employee. Everybody should be taught this when they first consider getting jobs.
OP says that had they known this, they would not have accepted the job. But if the student was offered over $3,000 for a summer job at that age, would they have turned it down knowing they would owe $500 on that income? Doubt it.
And hapymom is correct. There are no fines or penalties for owing this amount. This is simply self employment taxes. Amending the return is not going to change that.
The employer reporting requirement is triggered at $600.
However, from a practical standpoint, a student whose only income is from cash or contract type work and who doesn’t get enough to receive a 1099 is likely not earning enough to be required to file taxes-- so if the employer doesn’t file a 1099 and if the student doesn’t have other income, the returns don’t get filed and the taxes don’t get paid.
I’d add that college students really do need to be aware of the distinction because it is common to get a summer internships with a stipend, especially in the nonprofit world. Sometimes the stipend comes from the organization itself, sometimes from another organization providing a grant .
Keep in mind that self-employment also comes with the right to deduct business expenses-- so students who are taking work on that basis should also be keeping good records of out-of-pocket expenses or mileage for work-related travel.
Just adding the caveat that commuting does not count as a business expense. But travel in course of work – after arriving at the place of work – does if it is reasonable and necessary to the work. Such as travel to do further research, etc. Special purchases that fall outside of “personal” expenditures, such as lab coats, technical manuals, etc., would be deductible normally.
Being paid as an independent contractor may be quite lucrative. Many of their “employees” probably do not mind. But when you do not owe any income taxes then it becomes bad unless you can write of half your income or more as expenses.
^^Why would they prefer it? Even writing off expenses that would not otherwise be deductible, leaves them paying an additional 7.65% in unemployment taxes on top of the income tax.
They call it “self employment tax” but it is really the employer’s 50% share of social security and medicare withholding. Similar thing happened to my son. He took an unpaid internship (co-op) because it was at a very prestigious university laboratory. He functioned as an employee, taking instruction from his supervisor. At the end of the internship (6 months) he was delighted to receive an unexpected check for $3000, so on the one hand, it was all unexpected money. But still, it was very annoying later to receive a 1099 and ultimately have to pay the self employment tax. I still think he possibly could have categorized it as a tax free “gift”, but who wants the hassle? Just like the IRS will go after young people for unclaimed tips I think they find it easier to go after taxpayers with limited resources, who can’t hire high priced tax attorneys.
Probably a good thing to learn sooner rather than later that income associated with employment results in taxes one way or the other.
(Though many times university employers do not have to pay – nor are the students responsible for – social security and medicare taxes if the work is considered educational in nature. D’s part-time job when in college was treated that way. She was still responsible for any federal or state income taxes, but her W-2 showed social security and medicare wages of zero. Turbo Tax asked an, “Are you sure?” question and then proceeded along merrily. The only reason she had to file at all was to get some withheld federal tax back from a summer job.)
^^There is a general exemption (apparently) from Social Security taxes (and FICA and Medicare tax withholding) for students working at the school where they are enrolled.
I noticed that myself when I was helping my niece look over her W-2 and noted that she had no FICA or Medicare taxes withheld. She is a graduate student/R.A. at UT-Austin. I was worried that she would be deemed an independent contractor and owe self-employment tax but her wages were clearly reported on Form W-2. I had no experience with this prior to her situation.
Here is a short blurb from Turbo Tax on the matter:
Students working for the same school they’re enrolled at may be temporarily exempt from paying Social Security taxes. However, only students who obtain employment because of their enrollment qualify. In other words, if you work full-time in the registrar’s office of a university, and take advantage of the tuition-free enrollment the university offers its employees, you don’t qualify. If you attend school full-time, and the university offers you a part-time job that’s contingent on your continued enrollment, you do qualify. That only applies to the wages you earn at the university, not wages you earn from other employers.
The downside is that wages that don’t trigger SS taxes are also not counted towards SS credits but student employment is immaterial in a lifetime of FICA and Medicare tax-paying work.