Taxes Cause Fireworks Too?

Q. We recently ran a fireworks stand for a business in another state.  They have stands over about 4 different states and they hire people to manage them for them.  This was our first year running the stand.  We sold off of commission.  We were to receive 20-25% of net sales that we took in.  I just received the check from the company.  The check made out to me in the amount of just over $6,000.  It is my understanding that when tax time comes, I will be receiving a 1099 for that amount.

Here is my problem, I do not want to have to pay taxes on the full amount when I’m planning on giving about $4,500 in wages to 9 workers.  I also have about $500 in expenses.  The way it looks to me right now, is that in April, I will be paying income tax on the whole amount.  Can I write them checks as contract labor?  If so, what is the max on it?  How do I show those expenses after I get the 1099 so it doesn’t look like I received the whole $6,000?

A. Taxes, Taxes, Taxes.  Everyone seems to want to avoid paying taxes on their income for some reason.  Actually, it is your legal right to only pay the taxes you actually owe.  You should be taking advantage of all possible legal deduction opportunities that are available in the tax code.  In your case, yes, you will receive a 1099 for the amount you earned running the stand.  The arrangement described almost sounds like a franchising opportunity. I wonder whether you are actually “self-employed” as you are being classified or if you are indeed an employee.  I wrote an article about that one awhile back that you can read here.

If you are actually considered a small business, then you need to track your expenses incurred while running the stand like a regular business would.  As a self-employed individual, the income and expenses from your business will be reported to the IRS on Schedule C of the tax return.  Schedule C allows many types of deductions.  You can read instructions for that form here.  Valid expenses could be everything from vehicle mileage or depreciation, office supplies, employee and benefit expenses, licenses you were required to purchase, business meals, commissions, insurance, etc.  If you paid people to run the stand with you, those people were likely employees and should have been paid and reported properly through a payroll system.  Basically a valid expense is something that a an auditor would allow during the course of an examination.  If you take a conservative approach and have receipts and documentation for expenses, you are much more likely to keep your claimed expenses from being denied if you are audited.

Of course, the best way to make sure you are doing this correctly is to retain the services of a knowledgeable accountant.  Both the IRS and the state government will have unique tax laws relating to your situation.  Your accountant will become your trusted advisor while guiding you through the labyrinth of tax laws that exist today and helping you make better business decisions.  Good luck!

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Employee or Independent contractor

Q. I am a painter and my boss says I am an independent contractor. He says I have to pay all my own taxes and my paycheck will be my total wages instead of minus taxes. Is that correct?

A. Unfortunately, I can’t make the distinction of whether or not you are actually an employee. I can tell you that in my experience many workers in the service industry like painters, plumbers and other laborers are incorrectly classified. The issue is the level of control exerted over your work. For a definitive answer, you can complete form SS-8 and send it to the IRS for review. I wrote an article about this topic that you can read here. For purposes of this blog, I will describe the effect of both scenarios from a tax perspective.

If you are truly an employee, then the employer matches what you contribute to Social Security and Medicare. Depending on your state, you could be eligible for health benefits. Your employer will also pay FUTA and SUTA (state and federal unemployment). Your state also requires that enmployers maintain some sort of workers compensation coverage in case you are injured on the job. As an employee, you get a certain level of protection again lay offs and on-the-job injury that the employer must pay for. You can see why certain companies try to skirt these requirements. They are expensive.

As an independent contractor, you are liable for self-employment taxes and have no work comp or unemployment insurance coverage in most cases. This means, the “employer” saves a ton of money. He also moves the risk off his own business and sticks it to the contractor. This also means that you the contractor must file quarterly estimated tax payments with the IRS or risk large penalty and interest payments. You are liable for all taxes.

In a mis-classified situation where you are actually an employee but considered a contractor by your “employer”, it is very likely that the “employer” is not paying tax on his/her income either. The IRS has identified this as a significant source of the so-called “tax gap” and is looking closely at ways to find and audit organizations in these industries.

Good luck on your quest. Ignorance is often the cause of misclassification. However, more often than not, it is an outright attempt to hide from the government in my opinion.

How much tax for self-employed

Q. Is there a calculator that would help someone determine how much estimated payments I can make since I am self-employed?

A. Unfortunately, there is no easy-to-use tool for calculating self-employment liability for estimated payments. Because the self-employed have to match Social Security and Medicare, yet get a credit for it above the line on the 1040, the actually liability is much more complicated to determine.

The number you would start with is based on last year’s tax liability. This is determined by your accountant when you complete your 1040 form and associated schedules. Essentially, you can split last year’s liability into Read more »