My daughter (high schooler) took a summer job as a counselor at a local camp for three weeks. She showed me a form today that they required her to sign stating that she is a contractor and not an employee. It does not say so but I assume they will issue a 1099-MISC next year.
Will she be required to pay her own payroll taxes? I looked into being a 1099 contractor myself several many ago and looked at how much I would pay in payroll taxes, disability insurance, etc., etc., to figure out what hourly rate I wanted, but that was a full-time professional job. If you are going to get paid $8.50/hour for three weeks are you still subject to payroll taxes? Or is there some kind of minimum threshold? She will also have another part-time job as an employee in a yogurt shop, so her overall income for the year will be higher than just for those three weeks.
Is there anything else I should be worried about to avoid a “gotcha” at tax time next year?
I am not an accountant, but have lived most my life with only 1099s and self-reported income for taxes. So take this information with that in mind until an accountant or similar comes along:
They will be required to file a 1099-MISC if your daughter makes over $600. You are required to report all income, regardless of whether they issue a 1099 or not. You then will need to fill out a schedule C or C-EZ (probably the latter for you) and Schedule SE to calculate self-employment tax. It’s not all that difficult to figure out, but it’s a couple more forms to fill out. You might also want to look into what deductions you can take, as 1099 contractors are able to deduct certain expenses that 1040 employees can’t. And these deductions come off your Schedule C. They are unrelated to the standard deduction.
This is a battle that most people won’t choose to fight, but the camp is probably in the wrong to pay teenaged camp counselors as independent contractors. Independent contractors are not like hourly employees. They are generally people who are in business for themselves, who decide when they will perform the work for which they are contracted, and have some say over how they perform the work. I’m guessing that your daughter will have to show up when scheduled, will do exactly what she’s told to do, and is not in the business of providing camp counseling services. The camp wants to pay her as a contractor to avoid paying their share of the taxes on her income.
It seems odd that a camp counselor would be considered a contractor. As I understand it, the requirements for contractor vs. employee are pretty specific. It sounds as though the camp is trying to pull a fast one.
(Is the very short duration of the employment relevant? to the contractor/employee question?)
ETA: I see I was just beaten to this point. Oh, well, I’ll leave it here anyway.
Thanks but these are information for businesses who need to issue a 1099-MISC (except the first one which generates an error). What I need to understand is what paperwork and taxes does an independent contractor need to worry about that a W-2 employee does not.
Yeah, like puly says, it’s a schedule C and she’ll have to fill out a form that says, I’m a corporation of CookingWithGas’s Daughter, I have no employees, I pay no one anything and I provide contracting services in the following area(s). And she’ll have to calculate what her tax would be on the income. I used taxhawk to do my taxes last year when I had some 1099s and it was pretty simple, actually.
It’s stupid on the part of the camp because if she’s treated like a de facto employee, the IRS is going to say that she’s an employee and the camp is liable for all the stuff they’re trying to avoid.
Do you do your taxes with a program like H&R Block 2012 or whatever the other one is called? If so, it’ll have automated options for inputting the 1099-MISC data and any deductions you can take.
This my take exactly, and your guess is completely accurate. I am not happy that they did not tell her any of this until the end of her training day on Friday. Then she shows me this paperwork jus before she left the house this morning and of course she has no idea what it means. I told her that if they had explained this to her up front I wouldn’t have let her do it.
Yeah, that’s what it sounds like to me. They’re just trying to get out of paying payroll taxes. When you work as a W-2 employee, the employer pays for half of social security and medicare. As a 1099 contractor, I pay both sides. This is recorded in Schedule SE. You will pay 13.3% self employment tax on 92.35% of your net business (whether 1099 or self-reported–yes technically those little cash jobs you do like fixing people’s computers or mowing lawns or whatever are supposed to be reported) profits up to $110K-ish. (Don’t ask me why it’s that way, but first you multiply your net profit by 0.9235, and then by 0.133 on Schedule SE. If your net profit times 0.9235 is less than $400, then you don’t owe self employment taxes.) So that’s your self-employment tax. You do get a deduction on the 1040, though, for the employer-equivalent portion of the SE tax, which should reduce your income tax burden slightly.
Oh, also, you’re usually supposed to file quarterly taxes as an independent contractor, but it sounds like in your daughter’s situation it will not be necessary.
… posters theorize about employer avoiding taxes …
And they’re paying a tad over the minimum wage? I’d prepare daughter for more wage/hour-related issues down the road … :eek:
(Great name/post combination, BTW.)
My WAG is they are trying to avoid paying overtime. Won’t do them any good once someone (hint, hint) points this out to the labor board, and should infact bite them in the behind for treble damages down the line.
Idiots. They seem to forget that computers make paper trails very easy to find these days.
Just to clarify the above. The current SE tax calculation is 15.3% not 13.3. The 2% difference was the employee side of the social security tax being reduced as a temporary stimulus but that expired at the end of 2012. The reason for the calculation of multiplying your net profit by 92.35 percent is that there is an adjustment for 1/2 of the SE tax so the calculation reduces the SE tax by taking out half of the 15.3 percent (7.65 comprised of 6.2 social security tax and 1.45 medicare tax).
If she does not have any expenses related to the job she does not have to file Schedule C. She can claim the income as Other Income subject to SE tax on line 21 of form 1040. The form SE would still need to be filed if the income is above $433. There would be no difference in filing it this way versus on Sch C if she has no expenses except that some tax prep softwares for self preparers charge you more of a software fee when filing Sch C. Also be aware that if she does file Schedule C for this income and also earns other income from a different independent contractor job like babysitting or cutting grass, etc, she will need to file a separate Sch C for each business. You cannot combine the income/expenses from different professions on Sch C (you can combine income/expenses from different jobs if they are all doing the same type of work).
I do agree with the above posters that she should likely be considered an employee and not an independent contractor for this type of work and that the camp is trying to avoid paying payroll taxes. This could also adversely affect your daughter in not only paying additional payroll taxes, but most states do no consider independent contractors as eligible for unemployment benefits as nothing is paid into the state unemployment fund by the employer for contractors. You could always report the organization to the federal dept. of labor and your state’s DOL or other state agency in charge of state labor laws. There has been increased efforts to crack down in recent years on employee misclassification. Vice President Biden formed a task force and has coordinated the IRS with many state agencies to crack down on it. The organization could be subject to back taxes, penalties and fines for misclassifications.
Another strategy that’s open to misclassified workers is to report their 1099 earnings as “unreported wages”. Forms 8919 and SS-8 are used to do this. It’s a little extra work at tax prep time, but it has two advantages:
you report the employer’s information to the IRS, so the IRS will follow up with them later
the taxpayer only pays the 7.65% of payroll taxes - the employee’s share. The IRS will collect the other half from the employer.
Form SS-8 can be filed early on (like now) so that you can have a determination from the IRS before the tax return itself is due. That way, the taxpayer doesn’t have to be concerned about whether the IRS will agree or if it will try to charge them the full 15.3% SE tax.
This exactly. In the last week, our tax firm has had four different people come in because they are in deep shit with the state tax agencies for mislabeling employees as contractors. In truth, it’s usually the state agencies that catch this first, but the IRS eventually finds these things out, too.
In California, for instance, there is a seriously intense list to determine if someone is a contractor vs employee. If you are even grey area on ANY one of those things, the person is automatically an employee. TheIRS is pretty clear on those rules, too.
Frankly, I can’t imagine how an hourly counselor would ever be considered a contractor. They are just trying to skip out tax liability. Frankly, I’d point this out to the labor board and the relevant tax agencies, but I’m mean like that.
If this is the last year that your daughter will be working as a camp counselor, then for her benefit and that of future young camp counselors, it would be good for her to turn them in. But do understand that if she does that, she will probably never work as a camp counselor again. No, no, they won’t come out and say they can’t rehire her next summer because she complained. But they will point out that they had hundreds of highly-qualified applicants for each position.