What tax-related issues can arise for self-employed people and 1099 employees? Let’s discuss this critical subject today.
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Today we’re going to talk about the 1099 self-employed and their growing tax problems. This is a subject I deal with all the time when speaking with clients. Many of the people I have conversations with have no idea how to get into business, and make a lot of tax mistakes that end up costing them dearly. While, by definition, a person getting paid as an independent contractor, such as a Realtor, is self-employed, many employers try to pay their “employees” as independent contractors. They do this to selfishly save on costs like payroll taxes, worker compensation insurance, and benefits. As a result, this creates serious tax problems for 1099 employees, because they generally don’t understand the costs they’re agreeing to pick up. This includes expenses such as the IRS Self-Employment tax, Federal and State tax, insurance, and more. Many times, the unsuspecting 1099 employee is lured in by the prospect of earning more than a regular employee. The prospect of being able to work for more than one employer is attractive, as it suggests the possibility of increased income and independence. Being self-employed, though, equates to a huge cost and responsibility, as you will be required to pay 15.3% in Self-Employment tax on your profits. 1099 employees must also put aside estimated tax payments for this cost, as well as their federal and state income tax. Most who start out with this responsibility simply don’t understand the full financial ramifications and penalties associated with neglecting these payments. Instead, most 1099 employees simply receive their “paychecks” from their employees and spend the funds without regard these expenses. Personally, I would guess that 90% of newly self-employed people get surprised with a huge tax bill in their first year.
Being self-employed, though, equates to a huge cost and responsibility.
This lack of preparation puts them into a terrible and terrifying pattern of not paying, getting an installment agreement with the IRS, etc. They simply don’t have the money to get out of this cycle and also don’t want to compromise the spending that supports their personal lifestyle. Year after year, this problem will only grow. For example, I’m currently working with a young man who is a 1099 employee. This man’s wife is a regular employee, but under-withholds on her income taxes. For the past five years they’ve been accruing close to $10,000 each year. Now, they’ve accumulated a debt of $50,000 and are in the middle of getting divorced, while still facing this huge tax problem. Now, their only solution is to sell their home and use the proceeds to pay part of their taxes, as well as either using Installment Agreements to pay the remaining past taxes or an “Offer in Compromise” to decrease their debt. The young man is still a 1099 employee, but I am currently helping him sort through the prospect of becoming a regular employee. This transition would lead him to technically receive lesser pay, but, as I explained to him, the offer of lesser pay in this case is actually more than he’s currently earning as a 1099 employee. So, moving on from this situation, I’d like to address an important question: When should a newly self-employed person consult with a tax advisor? Actually, the answer is as soon as possible. Any delay in this consultation will cause issues. It’s easy to get in over your head, but hard to know what to do once you are. Once people reach this point, it’s critical for them to reach out to a tax professional who can help them work through their circumstances. And I don’t know of any tax professional that provides specific mentoring and guidance 1099 employees and self-employed people the way I do. So, if you are facing this problem, please give me a call or send me an email. I would be happy to guide you.And, as always, if you have any other questions or would like more information, feel free to get in touch. I look forward to hearing from you soon.