I am teaching a personal finance class. One of my students (a HS senior) approached me yesterday with tax questions. He is an independent contractor working for a flooring company. He seems like a fairly bright guy who was given a poor explanation of how to do the business side of things.

From my Googling, my understanding so far (please correct me if I'm wrong) is:

- He was given a W-9 by his employer. I am a bit unclear on what he is supposed to do with this. I understand he does NOT need to send this to the IRS.

- He is responsible for both halves of FICA (15.3%).

- His next estimated tax payment is due Oct 15th. So, this would be FICA + estimated taxes. Is there an easy way to calculate this?

- At the end of the year, he'll get a 1099-MISC from his employer and use that to file his 1040.

- Are there any handy apps/websites/rules-of-thumb I should recommend to him to help manage expenses/mileage/etc?

This guy's a hard worker, and I want to set him up for success. Thank you in advance for sharing your expertise on this matter.

1) A HS senior, you say? I'm willing to bet that he's not truly an IC, but that his employer is merely evading taxes and workers' comp insurance. VERY bad juju and unless he's really devoted to this particular job, I'd advise him to demand employment status or report the employer to the IRS and state department of labor.

2) As an attorney and one who was self-employed for a time, my best advice would be to spend a few hundred dollars on a CPA to do the taxes for him. It shouldn't cost more than that in his situation and you'll have a much higher probability that they're done right. There are way too many things that can get screwed up trying to attempt it without a good bit of education. Could be even more complicated if he's someone else's dependent.

ETA: The w-9 isn't for him. It's for the employer. They need him to complete that so they have his SSN or TIN to pay him and complete the 1099, which IS filed with the IRS.

-Rob

BurtonRW is correct. But I wouldn't report the employer - just tell the kid to get away from this "job" ASAP.
But let's say he doesn't - I'll answer your questions as best I can with the information you've given:

- He was given a W-9 by his employer. I am a bit unclear on what he is supposed to do with this. I understand he does NOT need to send this to the IRS. Fill it in and give it to the business owner. It's for their records.

- He is responsible for both halves of FICA (15.3%). That is correct - however - when he files his Schedule SE - he gets a "small" discount off the 15.3%.

- His next estimated tax payment is due Oct 15th. So, this would be FICA + estimated taxes. Is there an easy way to calculate this? Short answer: No. But I read the question as "How do I calculate my taxes so that I owe exactly ZERO when I file my taxes?" That's complicated. So here's the easiest way to do it: I tell MY clients to set aside 50% of their earnings. They probably won't OWE 50%, but that gets them used to the gravity of the situation, and, when they owe less, they'll be happy. Anyway, he's a kid, so his tax rates are PROBABLY low, so setting aside 25% might do it - depending on which state you are in...and that's a whole other ball of crap.

- At the end of the year, he'll get a 1099-MISC from his employer and use that to file his 1040. Yes, along with any other income.

- Are there any handy apps/websites/rules-of-thumb I should recommend to him to help manage expenses/mileage/etc? Oh, this is a fun one: the best advice: read IRS publications 334, 463 and 535. The IRS website is a more accurate source to find IRS tax law and regulations. Google does have some accurate facts, but there is also a lot of crap out there and situations where their advice is limited to specific events. You might want to be able to tell the difference in these situations and areas before you depend on it.

Good luck with all of this.

I don't think it is that far fetched to believe he's actually an independent contractor. I suspect that's common in his line of work. You'll have a flooring retailer that sells the product and then farms the installation out to third parties.

I would verify that's actually the case, otherwise he is getting screwed. The IRS explains it here:

https://www.irs.gov/businesses...t-contractor-defined

and

https://www.irs.gov/businesses...employed-or-employee

quote:

Originally posted by a1abdj:
I don't think it is that far fetched to believe he's actually an independent contractor. I suspect that's common in his line of work. You'll have a flooring retailer that sells the product and then farms the installation out to third parties.

I would verify that's actually the case, otherwise he is getting screwed. The IRS explains it here:

https://www.irs.gov/businesses...t-contractor-defined

and

https://www.irs.gov/businesses...employed-or-employee

It may very well be, but in this case, that may very well make him a subcontractor and if he's operating in that capacity without the necessary licenses/permits/etc., let alone in an unincorporated condition, he actually has bigger problems than taxes and the IRS.

-Rob

I'm not a lawyer and have had no formal tax education. After filing (multiple) Schedule C for a couple decades, as well as hiring subcontractors (is there a difference between a Sub and an Independent?), my take is this:

The total amounts are probably fairly low.

I'd do nothing now, file 2017 Schedule C (and SE) in January 2018, and forget it. Deduct everything under the sun which is plausible.

The chances of the lad paying any penalty are lower than practically nil.

To be an Independent without liability insurance places liability on the company owner. If the kid trips and breaks his arm, the company owner will eventually get the bill.

quote:

Originally posted by Woodman:
To be an Independent without liability insurance places liability on the company owner. If the kid trips and breaks his arm, the company owner will eventually get the bill.

Respectfully, what??

You're talking about two different things here.

Liability - the kid screws something up on a job and someone eventually gets left holding the bag. In this case, if Harry Homeowner comes to my office and identifies the 'employer', and the 'employer' then identifies the kid as a sub or IC, you had better believe I'm naming both parties on my complaint for breach of contract and while the kid may be effectively judgment proof, it's not going to protect him from being sued.

Workers' Comp - if the kid trips and breaks an arm, that's workers' comp. This happens to be exactly what I do for a living, and while the laws vary from state to state, they're mostly the same. In broad strokes, if the kid files a WC claim against his 'employer' and the employer can satisfy whatever adjudicative body that the kid is, in fact, an IC, the 'employer' is going to be off the hook. The only way the 'employer' gets the bill is if the kid is, in fact, and employee, in which case, the 'employer' is in for a world of hurt for likely not carrying WC coverage or the correct coverage.

-Rob

quote:

One of my students (a HS senior) approached me yesterday with tax questions. He is an independent contractor working for a flooring company.

My first instinct was the same as BurtonRW:

quote:

I'm willing to bet that he's not truly an IC, but that his employer is merely evading taxes and workers' comp insurance.

But...
a1abdj provides the links to the irs for further guidance. The IRS does prefer that people be classified as employees, because they prefer withholding.

If this is a part time/summer job I wouldn't try to tell him to quit. He's learning something and probably making more than he would otherwise.

The important thing is that he files a tax return on that 1099 money. He can probably use Turbo Tax Home and Business and be fine...

I am no expert, but many years ago I was an "independent Contractor".
At that time I always made the assumption that I was SELF EMPLOYED, and paid taxes accordingly. I had no "employer" even though I had regular, almost exclusive, "clients".

As a self-employed person, I had to pay my estimated taxes quarterly.

quote:

He was given a W-9 by his employer. I am a bit unclear on what he is supposed to do with this. I understand he does NOT need to send this to the IRS.

- He is responsible for both halves of FICA (15.3%).

- His next estimated tax payment is due Oct 15th. So, this would be FICA + estimated taxes. Is there an easy way to calculate this?

- At the end of the year, he'll get a 1099-MISC from his employer and use that to file his 1040.

Self Employment Taxes (FICA/Med) has a deduction above the line for taxable income. I use 12.5% for my clients
Next estimated taxes are due Sept 15, for net profits thru Sep 30.
W9 is used to obtain SS# by employer
It is common in the flooring, & many other construction trades to classify everyone as an independent contractor. The states & feds rarely pursue this against small contractors
Workers Comp is required for all construction employers in all states that I am aware of, no matter the size of the company or status of the employee. If the sub does not carry insurance then the contractor pays.
This is pursued by States & the Underwriter at audit time.
He probably has few deductions for his schedule C. Tools, gloves, knee pads, & mileage only if he is required to drive to the job. Mileage from home to employer's place of business is not deductable, but mileage from home to each installation job is deductable.

HE should save 25% of his check to pay taxes!

As a self-employed "consultant" for over 20 years, I can only advise you to tell your student:

1) there are a lot of taxes he may be subject to of which he is unaware. The Govt. is not going to advise him of this until it is too late, he needs to educate himself now, if not sooner. As an example, my county has a "Business and Professional Operating License" tax, that applies to many/most independent contractors who have home offices. Almost nobody who doesn't have to pay this tax knows anything about it.

2) Treat his "occupation" as a business. Keep separate business financial records to track deductions, etc. An accounting program is very helpful in expediting this task. Doing the same for his personal finances is also a good idea. The choices he makes now for how he runs his operation will make a big difference for how much he pays down the road in taxes. Keeping track helps one make better decisions, and forestalls the consequences of "surprises." I have used a program called "Moneydance" for this for many years, and can recommend it. Before I started my business, I used a variety of traditional business accounting packages, most of these are overkill for a proprietorship. There are many options in this area, but the key is to learn what to track and why.

3) Save save save. Don't spend ones entire income as it is generated. Start a SEP-IRA, and make the maximum contribution every year. Set aside additional monies to pay taxes and unexpected expenses (e.g. fixing his work truck when it throws a rod). Pay yourself first. Expect to put at least 50% of revenues into long-term and contingency savings.

4) Have a goal, develop a plan, and track progress toward it. Use this opportunity to get closer to where you want to be whether it is "money for college," starting a full-scale flooring business, or whatever.

WRT estimated income tax filings, I don't bother, and I don't worry about it. The fines and interest are not significant enough to be worth my time to effectively have to either prepare four tax returns per year, or give the Govt. an interest-free loan. I filed quarterly for many years, and found it a serious pain, especially when a big final quarter means one didn't remit enough earlier in the year, and you still have to pay a penalty. My revenues vary greatly from quarter to quarter so this might affect me more than your student, however, not filing quarterly doesn't mean you're going to jail, only that you'll pay a little more in taxes.

Please forgive my lateness in expressing my gratitude for the assistance. I am much obliged to you all. This gives me a direction to tell him to go.

I would advise him to look for a real employer. This "employer" is showing a lot of warning signs already.
Other than that, Burtonrw covered it.