I thought self-employment tax (=FICA 15%) is on the gross. I thought it always comes off the top regardless of other withholdings.
Correct. It’s 15% for everyone. If you are self-employed, you pay the whole 15%. If you are an employee, you pay 7.5% and the employer pays 7.5%. This is the crux of why the gov’t is so strict about considering most people to be employees under the law. They don’t want companies to screw the employees out of the 7.5% that the companies should be paying.
As long as you understand what’s happening, which is that he’s not evading taxes, he’s just passing them on to you.
If you were considered an employee, both you and your boss would have to pay a 7.5% FICA payment on your wages. By designating you as an contractor rather than an employee, he;s made you liable for paying both your share and his. His share on $10k of income is $750.
If your total income was only $10k, you many not owe any income tax after deductions. But the FICA is due no matter what. With $10k of income, you’re gonna owe $1500.
All discalimers apply. I am not a lawyer, accountant, or tax expert.
It’s calculated from your Net Profit, not your Gross Reciepts.
Correct … it’s based on your net self employment income after allowable business expenses are subtracted from the gross revenue.
In some way’s it’s “off the top” to the extent that it’s based on a segmenty of your total income before any personal deductions or exemptions are allowed. IOW, you could owe no income tax because you only had a few thousand dollars of business income and still owe SE tax.
Yes, but in the example of the OP, the boss is paying him under the table and he doesn’t expect anyone to pay taxes. The OP is being honest and wants to pay them anyway.
Which means the employer is almost certainly cheating on his own taxes or some such, because otherwise he’d want to be able to claim the wages he paid to Echo6160 as business expenses. There’s no upside to the business owner in paying you under the table unless he’s got a stack of cash that he doesn’t want the government to know about. So the employer gets paid in cash he doesn’t report and pays his workers in cash they don’t report.
Thanks for the info. I was thinking in terms of FICA coming off my gross income, even before tax-free withholdings like my retirement contribution.
Standard Deduction $5150
Personal Exemption $3300 per
Might be little left for the Feds to tax 
This was a few years ago, but when I looked into this, claiming self employeed was more likely to trigger an audit. Most of the time it was because the self employeed would claim certain business expenses that were out of line with what they should be. And that is why you will have to say where the income came from. If you were a self employeed house painter, the IRS would need to compare what you claimed for supplies, advertising, etc with what other self employeed house painters were claiming.
My husband and I are self-employed. We were audited a while back because the company who paid us on commissions of what we sold mistakenly sent the IRS two copies of our 1099. So we were accused of only reporting half the income that the IRS was told we were paid. Once we had the company show that the numbers we used were correct, and what caused the discrepancy , we thought that would be it. The auditor said once an audit is started, he had to go through everything. And he did. Every little thing.
For months he would call us in to explain this or that. Asking for more back up info on why we spent money on what we did. Our business phone averaged about $2,000 a month. He would ask, “What can you be talking about for that amount of time?” And we would have to describe in detail how we sold our products, got our customers, etc. Our postage was also very high. We had to bring in copies of what we were mailing out, and lists of people we sent info to. Trust me, earning money is much, much easier than explaing exactly how you do it.
When we thought there was nothing else he could demand of us, he called us in. He told us he had found a BIG problem. We get there and he tells us, with glee, that he added all our deposits into our various checking accounts and compared that to all that we received in commissions. There was a $400 difference. HA!! Explain that!! Well we did. My husband’s generous mother gives each of us a check for $100 for birthdays and Christmas. That money wasn’t taxable, so it got him no where.
The experience was an absolute nightmare. It was so unnecessary and took up so much of our time. The only good thing about it was that I knew we had done nothing wrong. We knew he could look all he wanted, and we would be fine, and in the end the IRS ended up having to pay us.
So from that experience I would second the opinion to get an enrolled agent. Your boss is evading taxes, and that may catch up to him. If the IRS or INS goes after him, they would likely look for all the employees not listed on the books and may find you.
An enrolled agent may know of a way that you can claim your income legally, but so far the ideas tossed out like claiming to be self employeed or an independent contractor would likely be seen as circumventing the law. Not that you would land in jail, or even be likely fined and penalized much if you did pay on the correct amount, but you would be submitting a tax form that you would know to be false, which goes against your earlier statement of wanting to be honest about the whole thing.
I feel bad for you in your situation. You obviously want to do the right thing and fulfill your obligation of taxes, but not at the expense of hurting your employer. You are in a tough spot and I think to be able to do that you are going to need someone like an enrolled agent to find the best solution.
I don’t know what the current statute of limitations on tax returns is, but you really don’t want to spend the next few years worrying about what might be found in this year’s returns if in the future you should get audited and they decide to go back as far as they legally can. And I do appreciate your concern for a boss who has been good to you. But remember he really is the one who put you in this situation. From all you have said, he is breaking the law, and I would really hate for you to have to pay in anyway for that.
I’ve been a contract employee for a while this year. My non-professional, non-legal thought on this is that you should be able to declare yourself a contract employee in this situation. I don’t know if you can do it without getting the pizza place owner in hot water, or if it is actually proper, but if you do, here are a few things you should do to make sure you minimize your exposure to doing wrong things. (Which is, I think, some of what you were originally asking.)
Read up on the Department of Treasury website about self-employment and contract employment. Money earned under self employment, including tips, is eligible for consideration in determining income tax. If you only earned $15k for the year, you may not owe taxes, but as others mentioned, will still owe self-employment tax. (More about that later.) If you have a regular job and the $15k is in addition to that, you probably will probably pay taxes when you figure out your 1040. In this case, the government will want you to pay estimated taxes on a quarterly basis. (Not having done that may result in owing some late payment fees.)
A good source for information is the IRS website. Read up on the forms and the instructions.
o 1040-ES: Estimated tax for Individuals (Listed under 2006 Form 1040-ES)
o Schedule SE (Form 1040): Self-Employment Tax (Listed under 2006 Form 1040 (Schedule SE)
The 1040-ES has a method by which estimated tax payments can be made every 3 months. The next due date is January 16. (I sent mine in today.)
The Schedule SE is filed with the regular 1040/1040-EZ/1040-whatever by April 15. This is the payment of Social Security taxes that should be done regardless of payment of other income taxes.
I would believe that doing taking these steps would help minimize future tax liability if things get messy. Of course, the best thing to do would be to ignore all I’ve written and follow DrDeth’s advice in post #18. A tax professional can help you figure out if what I’ve mentioned is feasible and legal and, if you are self employed, can help you claim proper deductions for vehicle use and other expenses.
Good luck.
Preview PS – Grits and Hard Toast looks as if she has some relevant advice to add to the mix. Whew!
That is a good point about the quarterly estimated taxes. I don’t know if you have to earn certain amount for that to kick in, but if echo would have to pay an additional penalty because he did not already do this, that would really be bad.
That is why an enrolled agent is needed here. Echo might chose what looks to be a good idea, like claiming self employed status, only to find out it costs him even more than anticipated. And then he may need to explain why he went from self employed in 2006 and then to employee status in 2007.
My guess about would be because pizza delivery is such a common job, it would have already been looked at by the IRS and designated an employee position. I think some people can be considered independent contractors or considered self employed if the specific tasks they do, or the schedule in which they do them is different from “normal” employees.
When I left my full time employee position, I stayed on as an independent contractor. Although I did many of the same things I did when “employed” by them, I did set my own schedule and was able to turn down projects and out of town trips I didn’t feel like doing. As an employee that wasn’t the case. I am having a hard time imagining how to make echo’s pizza delivery job different enough to qualify as something other than an employee who is expected to show up and work certain shifts and do whatever the boss needs done around the shop. But again, that is why a professional who knows all this stuff is needed.
But paying quarterly taxes is something to avoid if it isn’t really needed, and something to consider.
Whether or not the OP chooses to report the income, he/she is still getting screwed out of the 7.5% FICA contribution the employer is obligated to make. That’s $185 going into the boss’s pocket that should be going into the OP’s Social Security.
You might owe little or no income tax, but in the scenario here, you’d still owe over $2,000 in Self-Employment taxes. That’s Two Thousand Dollars+ to be perfectly clear.
Unless the employer is paying the OP extra to account for that. We really don’t know.
To get back on track here, I think I found exactly what the OP is looking for
Form 4852
This form is what you use when your employer doesn’t give you a W-2. I think it might cause problems for the employer though.
That’s *if *the OP is an “employee” and not an “Independent contractor”. We do not know enough to make that determination. Or at least my Bro, a Tax Expert Enrolled Agent with 20+ years experience sez he doesn’t know enough.
You’re jumping to a legal conclusion only a Enrolled practitoner who has interveiwed the OP fully should make.
I just based that on him talking about his ‘employer’ throughout the OP. Perhaps the employer never submitted the OP’s info to the state to show that he is an employee, so I was just going from info in the OP.
No question about it… it would cause problems for the owner of the business.
It sounds to me like Echo6160 is more than happy with the way he is being treated and there is no reason that he can’t pay the taxes (income and SE) that he owes totally on the up-and-up from his side of things.