Astro Findings
18% of people are categorized incorrectly… and the cost of being wrong can be pretty high!
There is a big difference between an employee and an independent contractor when it comes to federal taxes. If you are incorrectly categorized as an independent contractor when you are actually an employee, you could pay a lot more on April 15th. Find out below and find out more at irs.gov.
Employees
As an employee, your employer pays half of your FICA and Medicare tax. You pay 7.65% and your employer pays 7.65%.
As for federal income taxes, most employees elect to have their employers withhold tax from their pay on Form W-4.
Independent Contractors
As an independent contractor you pay the entire 15.3% of FICA and Medicare tax (referred to as “self-employment tax”).
In addition, independent contractors do not have pay automatically withheld for federal income taxes. They make federal income tax payments , or Estimated Tax Payments by sending in Form 1040ES.
Am I an Employee or Independent Contractor?
The biggest factor in determining if you are an employee or an independent contractor is who has the control of the result of your work: you or someone you are working for? If you have the majority of control, you are most likely an independent contractor. However, if the organization (or person) that you are working for has the majority of control, you are most likely an employee.
The IRS specifically looks at the following three areas of control for determining a worker’s classification. Here are how some of the factors could be applied to these areas:
Behavioral Control – if someone else controls what work will be done and how the work will be done, you are most likely their employee. If you receive direct instructions from someone else concerning your work, such as when, where, and how to do the work; what tools or equipment to use; or where to purchase supplies and services, you are most likely an employee.
Financial Control – if you have a significant financial investment in the work you perform (including assets or tools you need to complete the job), you are most likely an independent contractor. If you are responsible for purchasing the tools and materials needed to complete your job, you are most likely an independent contractor. If you will personally realize either a profit or a loss, then you are probably an independent contractor.
Type of Relationship – if you receive benefits (such as health insurance, retirement plans, or paid leave) from the person or organization you work for, then you are most likely an employee. There may even be a written contract that details the nature of your working relationship, i.e. employer and employee or an explicit statement that you are an independent contractor.
What Does it Mean to be Classified as an Independent Contractor?
If you are an employee and you are incorrectly being treated as an independent contractor, your tax bill is going to be much larger than expected. On top of being responsible for the entire amount of FICA and Medicare tax AND having no withholding, you will also be assessed an Estimated Tax Penalty for failing to properly make your estimated tax payments (even though you may not know you needed to make them). Or have unfiled tax returns.
What Do I Do if I Am Not Sure About my Current Classification, or If I Disagree with My Current Classification?
The IRS will issue a determination for you if you either disagree with your current classification or cannot decide which is the correct classification for you. You will need to file Form SS-8 with the IRS, in order for them to make a determination on your behalf. Once you submit the form, the IRS may ask for additional information from both you and whomever you worked for. A technician will be assigned to the case and will make a determination based on the facts of the situation and the law.
It could possibly take six months or more for the technician to make the determination – so don’t expect a quick turnaround time. While you are waiting for a decision, you can file Form 8919 with your federal income tax return, in order to pay your half of the FICA and Medicare taxes.
If you do not agree with the decision of the IRS, you cannot appeal; however, you can request that the office reconsider the decision if you have additional information that was not previously included.
Reed
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Tags: Unfiled Tax Returns
Posted in Taxes · March 6th, 2010 · Comments (0)
Some marriages end in divorce. The fact is, in the United States, divorce occurs in almost 50% of marriages. In some cases, tax problems can occur after a divorce or separation is finalized.
What exactly is Innocent Spouse Relief?
If you previously filed a joint return with your spouse, and you believe that you should not be held accountable for mistakes made (or fraud committed) by your spouse, then you could be a candidate for Innocent Spouse Relief from the IRS.
The Three Types of Innocent Spouse Relief:
Traditional Innocent Spouse Relief – Your spouse filed something wrong on your joint return and you are potentially not liable for the tax debt that occurs after the error is corrected.
Separation of Liability – If there is a balance due on your joint return, you could be responsible for only your portion of the amount due. This is based directly on your income and withholdings and/or payments you made.
Equitable Relief – If you do not qualify for the first two types of Innocent Spouse Relief, the IRS may grant you Equitable Relief because it would be unfair to hold you responsible.
The following requirements must generally be met in order to apply for Innocent Spouse Relief:
You must file Form 8857 no later than two years after collection on the liability starts
You must file a joint return
You must have an understatement of tax (you owe the IRS money) due to error(s) by the other, non-requesting spouse
At the time of the signing of the return, the requesting spouse did not know of understatement of tax (and can prove this)
It is inequitable to hold the requesting person who did not know of the error liable for the additional tax
What Are My Chances for Obtaining Relief?
Assuming that you meet the above requirements, www irs gov shows the following eight factors show what would improve your chances of having an Innocent Spouse Relief claim approved and those that would decrease your chances for approval:
Factors for Relief
1. Your marital status is divorced or separated (for Separation of Liability, it is required for at least the past 12 months)
2. Requesting spouse will suffer a hardship due to the error
3. The requesting spouse has suffered abuse
4. In a divorce decree or separate legal arrangement, the non-requesting spouse is obligated to pay the liability (it is helpful if the decree states why the non-requesting spouse is liable – i.e. it was their error that was not known to the requesting spouse)
Factors Against Relief
1. The understatement is attributable to an error made by the requesting spouse
2. The requesting spouse had knowledge, or a reason to know, of the omission or error
3. The requesting spouse received significant benefit from the income that was understated
4. In a divorce decree or separate legal arrangement, the requesting spouse is obligated to pay the liability
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Tags: IRS
Posted in Taxes · February 13th, 2010 · Comments (0)