I just started working very part time for fun at my friend’s new coffee shop. I’m working on 8-10 hours a week and I enjoy it. Yesterday I was asking him some questions because I noticed that no taxes came out of my first paycheck. He said he’s going to give us 1099s.
I find it annoying, it will change my whole tax situation a lot, plus he’s not contributing to social security as far as I know. Also he is a friend so I don’t want to see him get into trouble, though from the sound of it someone advised him to do it that way. I don’t think a barista qualifies as an independent contractor. Right?
I’m not a tax professional… but I did have a household employee (nanny) for some years, paid all legally and everything - so I did a fair bit of reading on the subject when we were getting things set up.
It’s hard to imagine a barista being considered a contractor.
Per the IRS at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html: Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
If your earnings are below a certain ceiling (something like 1000 per quarter, but do NOT quote me on that), then social security, unemployment etc. are not required.
Sounds like the friend is trying to do things on the cheap (avoiding employment taxes) and easy (doing payroll all legal can be a bit of a pain). It’s a risky approach.
Oh - and do keep very detailed records of what you’ve been paid including tips. Look into filing social security taxes etc. on your own (at that link, see “Misclassified Workers to File New Social Security Tax Form”). I’d bet this would get the IRS after your friend, however (just guessing).
There’s no other type 0f 1099 he could be talking about either, correct?
I don’t know what he’s thinking with this. I’m sure he’s trying to simplify payroll- he must not realize that it’s illegal. He said so-and-so said he should do it that way, I assumed that so-and-so was someone who knew what they were talking about, like a tax preparer.
That’s correct. He’s trying to get out of paying payroll taxes, which is very much illegal. Surprisingly, the IRS handbooks on the matter are usually pretty easy to follow: check it out for yourself.
He’s also boning you here, just so we’re clear: you’re now going to have to pay self employment tax on what you’re being paid, something you otherwise wouldn’t have to do. So, to save himself money, he’s costing you money (about 15%, if I’m remembering correctly).
Well, about half that, really. I think the rates (for SS and FICA together) are 7.65% for the employee, and 7.65% for the employER.
The employee would have her 7.65% deducted, and the employer would match that. As self-employeed, she’s got to pay her 7.65% and the employer’s share.
Now, the friend may well have gotten such advice. A friend of mine works for company A, placed as a contractor at company B. Company A gets a cut of her earnings, and company A does treat her as a 1099 employee, so she has to handle all the taxes herself. Stinks, really (but at least this friend is used to doing self-employment taxes so has everything set up for that).
But in any case, it does sound dodgy especially in the OP’s situation.
If he wants to get out of paying taxes, why is he doing this instead of paying you under the table? It just doesn’t make sense. When you file taxes they ask for your job title… filing a 1099 as a barista is going to raise a red flag. Tell him that, and then either stop working for him or tell him to get his shit together. I can’t advise you to encourage him to pay you under the table because that’s illegal.
I have no additional advice, but would just add that I used to have a job where (among other things) I worked on some of the equipment in those little espresso huts and payroll funny business seemed to be very, very common. Some were plain old paying under the table, but a lot of them seemed to have similar “almost legal” arrangements like in the OP (as if the IRS would give them credit for trying?).
A great many of these ended up owing their employees (and us!) a lot of money when the health department/business license people/IRS finally caught up with them. I think a lot of it is that an espresso hut is a business that costs less than a new car, but which unless run very well has almost no margin. It tends to attract people who want to be casual business owners but who quickly get in wayyyyy over their heads.
Well, somebody should let him know that you can also deduct the wages/salaries you pay to employees as an expense too. And that has the advantage of conforming to the law.
Right. He dictates the hours of work, or when your work is necessary, therefore you’re an employee and not a sub-contractor.
If you where a sub, you should have submitted a proposal to him with a description of the task to be completed, a time schedule, and a final price. What he’s doing is not agreeable to the IRS.
The above is a simplistic analysis, but for what you described, you should be getting a paycheck. With a 1099 you have to pay your own Soc. Sec. and Medicare (?) taxes that he didn’t pay as an employer. Consult IRS.gov or your tax professional for which forms to fill out next year if you get a 1099.
I’m pretty sure he doesn’t know how serious it would be, and I’ll tell him what I have learned. I’ve done 1099s before and they’re a pain, so I am happy to tell him that it’s a bad plan.
