Don't be a faux-indie.

                         
I receive so many questions asking whether someone should choose to work as a self-employed or an employee. The simple answer is: It is not a choice. It is circumstance that determines your work status.

The complication arises because everyone wants to manipulate the work situation to his or her best tax advantage. More often it is the person doing the hiring who wants to cheat. Yup. It's cheating. It's fraud.

Who gets screwed: The one who does the hiring or the one who does the work? More often the one who does the work.

Do many get away with it? Yes, they do.

Do they get caught? Sometimes.

Are taxes, interest and penalties assessed when caught? More often, yes.

Why do workers accept an unfair and fraudulent work status? Because they need the money. If they question or complain they will not get the work because someone else will step right in to do the job as a faux-indie.

Be sure to read Employee vs. Self-employed for more info on how the IRS determines work status.

Below are four worker situations that my web visitors questioned. And there's one question from someone doing the hiring.

BTW -- I've shortened their queries a bit.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Hi June,

I graduated from dental school and found 2 part-time jobs working as a dentist in Queens, NY. Both employers are classifying me as an Independent Contractor and will file a 1099 at the end of the year.

I get paid $500/day. I think I'm supposed to be an employee since they are dictating the days and hours I'm that I'll be working and they are supplying their patients, office and supplies for me to use to treat their patients.

The thing is this seems to be the norm for dentist jobs in NYC. Every interview I've been on has only offered a 1099.

-- Jennie

[Jennie then listed many questions on how to avoid this situation, including incorporation, forming an LLC. None would be to her advantage. She is an employee.]

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Hello,

I work in Farmville, VA as an office assistant for 3.5 years. My problem is this: The IRS defines me as an employee. The company I work for would rather list me as a self-employed person which I have done for the past 3 years. I need to know how they should record reimbursements I receive so they do not show up on my 1099 as income. They use QuickBooks and I am the one entering the bank statements monthly. What is the best way to record these reimbursements?

Tahirah

[The company would "rather" list you as a self-employed. Rather?! Tahirah is an employee. The reimbursed expenses are expenses of the employer.]

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Hi,

I'm debating on either becoming a w-2 employee for my Dad's company or an Indie and charge his home health care business a consultant fee. I've kept my self up to date with Medicare laws for home health care and have been training individuals for Medicare billing as well as setting up their organizations. My dad's company (who has two other partners) are requesting my help and I need to let them know how I want to get paid.

Please help me in this ordeal, would this profession be considered self-employed or would it constitute a relationship. I will inform this agency the guidelines and audit patient charts and will propose a corrective action. I have never worked independently so I'm a little worried about calculating my own taxes.

I would appreciate all your help.

Thanks. Fahad
West Chester, OH

[Were Fahad to offer his services to only his father he would be an employee. But since he offers similar and related services to many others it appears he is self-employed.]

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
June,

I came across your site and it's very good. I'm trying to determine if I'm an Indie. I started working for just one mortgage processing company that had only 1 client.

I signed an indie contractor agreement. So I got a 1099-MISC.

The mortgage company was my only source of income. I have a lot of freedom to do my job but all my business was paid by one company who had 1 client. They did have some control as to what banks business was done with. I had expenses but of course no taxes taken out. It will make a huge difference as far as my tax bill this year since not having worked as a 1099 person, I didn't set much aside in quarterly payments, oops!! What am I??

HARVEY
Broomfield, CO

[How much is a "lot of freedom?" What is "some control?" A contract does not change or negate tax regulation. This should have been discussed with the mortgage company before Harvey started to work for them. He is an employee.]

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Hi June,

I'm a Self Employed Website Designer living in Ocala, FL. I started my business in 2009. I haven't the income to hire any employees at this time.

I have considered inviting a private contractor in to help out with sales and client services. He would get a percentage of any work he brings in. I've found someone with sales experience who would like to do this, but he's not self employed. What steps does he have to take to become a private contractor? And, what steps do I need to take to have a private contractor work for my business?

Thank you,
Sandra
Ocala, FL

[Only if the worker offers his services to others in addition to Sandra and he also meets the relationship-control criteria may he be considered an independent.]

One day does not an indie make.

June --

I'm in Burlington, KY and I was last a director of operations at the Creation Museum (Answers in Genesis) but have been laid off for two years. I THINK I've been an indie for 1 day.

A former co-worker (lecturer/author) just left the same organization that laid me off (I was there 11 yrs)and started his own ministry. He has asked me to do some part-time admin support for him from home using his laptop and cell phone. Does that make me an Indie?

Ted
Burlington, KY


Hi Ted,

No, you're not an indie if you work for only one day. That's considered incidental income because you are not engaged in a business nor motivated by profit. You must include the income as "other income" on page 1 of your 1040 tax return.

If, however, you mean that this is the first day of working on a regular basis, albeit part-time, for a former co-worker it sounds to me as if you are an employee, not self-employed.

Take a look here Employee vs. Self-employed for more info.

-- June

Forced to incorporate is a quirk of the company.

Hi June,

I'm a New York City Indie Sound mixer for TV, 10 years. Thanks so much for your very informative web site.

I'm so confused this is the second company that has sent me an email with this content. "Hi Sheila, Helen forwarded your invoice and w-9 form to me – however, we cannot pay you via a w-9 form. Because you are not incorporated, we need to pay you via a w-4 and withhold payroll taxes. You will be issued a w2 for 2010 tax reporting purposes. We are obligated to follow the instructions of New York State Department of Labor. Please complete the attached, including a signature and a withholding exemption amount on line 5. You may email it back to me, mail, or fax." I have not sent a reply to this request.

I am wondering if i should incorporate (which you don't suggest). Some years ago I used a DBA. I could I use the name I used then to get a tax id number and set up a bank account and ask this company to issue me a 1099 to the DBA?

If all my vendors start doing this will I lose my ability to deduct.

I welcome your comment.
Sheila


Hi Sheila,

If you are legitimately self-employed then there is no New York state department of labor law that says you must incorporate or you must be an employee. That demand is a quirk of the company.

Here's my post with good overview of the requirements for self-employment: Employee vs. Self-employed. And here's a post of someone in a similar situation: Forced to be an employee!

If the company will accept a federal ID # or a DBA [doing-business-as meaning a name other than your own] or even an LLC then by all means do one of those rather than work as an employee or even more cumbersome and expensive, forming a corporation.

Would be great if you could get me a copy of the instructions of New York State Department of Labor that Helen says they are obligated to follow.

Pleased that my site is helpful. Thanks for letting me know.

-- June

Confusion abounds: LLCs & Employee vs Self-employed

Hi June--Great website!!!

I am the sole owner of my business--it is a LLC--I do have a salary which my business pays me on a monthly basis.

My question actually has nothing to do with taxes, but rather what do I put down on a HELOC [home equity line of credit] loan application--Employee or Self-Employed(Indie)?

My friend told me--for the purposes of getting a loan--it is always better to be classified as an Employee rather than a Indie. Is this true?

Please help!
Thanks,
Ty


Hello Ty. Thanks, glad you like my site.

Your question came in about 2 months ago so you may have resolved your situation. However, the elements of your question make evident the kind of confusion typical for indies. Perhaps my response will help others.

As I hope or wish all of you would know by now -- if not read here business entity -- LLC -- an LLC is not a tax entity. It is a legal entity. You can be a sole proprietorship LLC. You can be a partnership LLC. You can be a corporation LLC [that would be really silly, tho.]

So, when you say you are an LLC there is no way for me -- or anyone else -- to know what kind of LLC you are.

Ty, you say you are " the sole owner of my business--it is a LLC." That would lead me to assume that you are an LLC structured as a sole proprietorship. In tax jargon that would be an LLC structured as a disregarded entity.

However, you then say that you "have a salary which my business pays me on a monthly basis."

A sole proprietor does not receive a salary.
A sole proprietor has either a profit or a loss from his or her business.
A sole proprietor is an independent contractor.
A sole proprietor is self-employed.
A sole proprietor is an independent professional.
A sole proprietor is an indie.

Only employees receive a salary.

And Ty, you ask "what do I put down on a HELOC loan application--Employee or Self-Employed(Indie)?" Well, you must put what you actually are. If you don't you are submitting a fraudulent document. Not good. I can't tell you what to put because I don't know what you are. And I gather from your question that you may not know either.

You need to talk with the pro who set you up as an LLC. FInd out what kind of LLC you are.

If you formed your LLC online with no professional guidance, well, you have a situation that must be resolved.

-- June

Take Charge

June --

After an extensive web search fiasco, it seems you are "the best-of-the-best" when it comes to answering tax questions for the self-employed artist! (CONGRATS! lol) I'm trying to learn ASAP what I need to do in my situation. I am a graphic artist.

I worked for the same company for 10 years. W-2 / $1000 every 2 weeks ...some months had 3 pay periods. I brought home approx. $850 every paycheck. NOW they want to 1099 me for a straight $2000 each month. So that's a pay cut.

I do work from home in my own office, but never took the deduction. I haven't a CLUE where to begin.

I bought a better house & cars not too long ago, so don't have a lot of money set aside...2 little girls...live-in fiancé altho the IRS doesn't know he lives with me because he owes them.

I was able to receive a decent earned income credit my accountant says. She's never charged me more than $100 to do my return.

Can't believe they are doing this to me after 10 years. I need to know how I can maximize this $2000 a month at taxtime or we aren't going to make it. I'm not sure how much to keep out for the IRS. Do I HAVE to pay quarterly or can I pay at the end of the year?

I just don't know what to do to keep my family afloat without getting punished by the IRS later. Liiving in Central IL doesn't offer much advice without a hefty pricetag. Any advice would be GREATLY appreciated.

Sincerely,
Becky
Illinois


Wow, Becky! I understand your fear, confusion, and not knowing which way to turn. Let's break this down into small pieces as you presented them. Then, as the mother of two, you need to take charge and deal with each piece.

The company you work for cannot legitimately switch you from an employee to a self-employed without making any other changes. Please read this post Employee vs. Self-employed. The company is doing it to save money and in the process will cheat you.

As an employee you were earning $26,000 per year [$1000 X 26 weeks]. As a self-employed you will earn $24,000 per year [$2000 X 12 months.] That save the company $2000. In addition to that, by paying you as a self-employed rather than employee, the company will save an additional 20% to 30% in payroll taxes and benefits. That's a minimum of $4800 [$24,000 X .2]. So the company is
saving approximately $6800.

It is fraud. Usually I suggest posts to read. I insist you read this post Homeland Security or Jobs 'n' Things . After you read it decide whether you want to pursue kicking this company in the rear or going along with it because you must keep the work. You say that you "Can't believe they are doing this to me after 10 years." People and businesses mostly do to you only what you allow them to do.

You have a "live-in fiancé altho the IRS doesn't know he lives with me because he owes them." How much does he contribute to the household? Anything? A fiancé may become a husband. His IRS problems then become yours. Yes, yours! He must take care of that now. Time for both of you -- or you alone -- to take on the responsibility of clearing up the financial part of your relationship with your future husband.

Is the father of the children paying any child support? If not, talk with the agency in your state of Illinois that will help you with that.

You also say that you may get "punished by the IRS." Where did that come from? Punished? The IRS collects the same taxes from you, from me, from every indie and from all employees. Don't blame the IRS because a company is engaging in fraudulent business practices.

If you accept the company's offer and do become self-employed you will find the answers to all the questions you asked above as well as how to get the lowest tax possible, how to keep records, and how to calculate and pay estimated taxes on this blog, on my site and in my book, Self-employed Tax Solutions.

You are not the victim. You are responsible for three lives -- yours and your two daughters. You need to review and take charge of the circumstances you are currently in. Women are tough. You can do it.

All the best,
June

Employee and self-employed income and expenses must be kept separate.

Hi June,

Question. My wife, who is an INDIE, started working part-time this year for a company that will issue her a W-2 at the end of the year. They are also doing the withholding taxes. She is still doing her independent contractor work with several other clients, usually in the morning before she goes to the part-time work location (out of her home office).

How do we report her W-2 income? I think she gets a 1099 from her other clients. The simplest for us would probably be to keep it within her sole proprietor business tax forms.

Thanks, we are enjoying your book, but couldn't find this question in it.

Dan


Dear Dan,

Glad you are enjoying my book, Self-employed Tax Solutions. Thanks for letting me know.

You didn't find the specific answer to your question in Self-employed Tax Solutions because yours is a how-to question regarding tax return preparation I do not encourage indies to prepare their own returns and my book doesn't explain how to prepare a tax return for a self-employed.

You will find the following in my book:
Simply stated: if taxes are withheld it's W-2 income; and if no taxes are withheld it's self-employed income...
... It is important to understand the distinction and to keep them separate in your records. Why? Because they are treated differently on your tax return and the tax you pay on each is not the same.

Tax returns for indies are complex. Your question indicates a lack of basic understanding of the difference between the two types of income. If you do your own return you'll very likely cheat yourself.

Now to answer your question:
You cannot combine the two. You must keep the income and expenses related to W-2 income completely separate from the indie business income and expenses. Although on the same 1040 tax return each kind of income uses different forms within that 1040 return.

Use a tax pro or go to H&R Block. Don't mess yourself up.

Best,
June

I don't want the hassle of a payroll.

June --

I am from Vancouver, Washington I work for a Supported Living Agency.

Just starting as an indie. I am starting a 16 voice, Male Choral Ensemble here in Vancouver. I had hoped to pay my singers and director a percentage of net sales from each concert series. I thought I could treat them as independent contractors and only have to issue a 1099. I had hoped to do this mostly to avoid all the payroll expenses associated with having employees. I am finding that the IRS would not allow such a classification.

I am now looking for alternative solutions to this dilemma. I am operating as a sole proprietor currently, but wonder if there is another structure that would allow me to pay my people, but avoid the workers comp,unemployment and any other expenses that would take money away from the business. Is there a way to have contracted singers even though the compensation is minimal and would not in the beginning even cover minimum wage?

Matthew


Dear Matthew,

The structure or entity setup of your business is not the determining factor in how someone is paid. The determining factor is the kind of work relationships there are between the person or business doing the hiring -- that's you -- and the people working for you.

Those relationships determine whether it's an employer-employee work arrangement or an independent work arrangement. Read this column from my website for a better understanding: It's all about relationships: Are you an employee or are you self-employed?

-- June

A freelancer's business expense cannot be deducted as an employee's expense.

Hi June,

I am a writer. I have a question about Schedule C deductions versus unreimbursed employee expenses on form 1040.

I'll have a significant amount of charitable donations this year, not to mention all the state tax I paid this year that I understand is deductible on the 1040. But I won't exceed the standard deduction level.

What would one need to do to treat indie expenses as unreimbursed employee expenses? I am, after all, an employee of myself, right? Is this smart or dumb? Legal or not?

Thanks! I love your book. Best $13 I've spent in a while.

Rachel
Alexandria, VA


Hi Rachel,

To set the stage:

• Everybody deducts personal expenses on Schedule A.
• Employees deduct all their business expenses on Schedule A.

Self-employeds deduct all their business expenses on Schedule C.

Both Schedule A and Schedule C are part of the Individual tax return Form 1040.

All business expenses may be deducted on Schedule C. Only home office has restrictions based on income.

There are several income restrictions as well as deduction restrictions on Schedule A. Often, depending on income or total expenses, employee business expenses on Schedule A may be lost, that is, you get no deduction.

A deduction on a Schedule C is much more of a tax advantage than the same deduction on Schedule A.

Rachel, to answer your questions:
You cannot deduct self-employed expenses as employee expenses. You may split an expense between employee and self-employed if it is used in both your work situations, a reference book for example.

You say, "I am, after all, an employee of myself, right?" No you are not. You are self-employed. Employees are people on payroll, who have taxes withheld by an employer and receive a W-2 at year-end.

You may be a freelance writer and also have a job on a magazine. In which case you would be both self-employed and an employee.

You might want to read these posts employee vs. self-employed for a better understanding.

Glad my book is helpful. Please tell your friends and colleagues.

Best,
June

Cruising Both Ways

Hi June!

I need help! Here's one for you: I am a cruise ship employee from Manasquan, NJ and I've worked for Choppy Cruises for over 4 years.

My issue is that, technically, I am not self-employed but I get a 1099 from Choppy every year. I pay my taxes but this year I owe a ridiculous amount and I'm frustrated!

I have to pay a self-employment tax but I am an employee of Choppy. I wear their uniforms, abide by their contracts and rules of the ship. They pay my flights and feed and house me. I work outside of the USA but my pay is wired directly into my bank account out of their USA bank account. I save my receipts and write off as much as I can. I know some other Americans from the ship who don't pay taxes on their income.

Am I an idiot?

Is there some maritime tax law I don't know about? Is there any way to get around paying the self employment tax?

Please help!!
Paige


Hi Paige,

"Am I an idiot?" My guess is that you are not an idiot. But you do want to have your cake and eat it too. Apparently, you weren't concerned about the probable misclassification as a self-employed until it was disadvantageous to you.

You must decide whether you want to educate yourself on self-employed status and then whether or not you want to take action based on what you learn.


Be sure to read my post Cruise Ship Entertainer Gets No Tax Breaks

By the way, the folks not claiming income are committing fraud. Not good.

I changed the name of your cruise company ... just in case.

Best,
June

Freeworld and Aquent

Hi June,

I'm a graphic designer from Los Angeles, CA and I've been a freelancer for 3 years. I had a question I was curious if you could address on your blog. I recently discovered a site through a motion graphics forum called Freeworld (http://www.hellofreeworld.com/) that claims to allow freelancers to change their work status from 1099 to W2 while enjoying the benefits of both (in other words, they claim you are still able to take business deductions). From everything I've read from you, it seems like this is some sort of scam or perhaps the found a hidden loophole? I remain skeptical, but the guy who started it is a rather respected individual in my industry. What do you think?

Frederick
Los Angeles, CA


Hi Frederick,

A little skepticism is good.

I don't know Freeworld but I do know Aquent. I assume they are similar in structure . Aquent is a reputable organization and has been around a good while. I wrote for them about 10 years ago.

If I remember correctly Aquent was started In Boston by a guy in college hiring out his fellow students who were well versed in MACs to businesses in need of people who knew what they were doing. From that Aquent grew into a multinational corporation. Aquent screens the talent -- graphic designers, ITs, etc and matches them with businesses that need that talent for a long or short period of time. Very similar to temp agencies, however, their workers -- the talent -- are in specific areas of graphic design, technology and marketing.

The talent is an employee of Aquent not of the company for which the work is done.

As an employee the talent can deduct all business expenses BUT the expenses cannot be deducted in the same place that indies deduct their expenses. So, although in theory they are deductible the expenses are always reduced and often lost completely.

Best,
June

Unemployment Compensation

"W-2 people" is my shorthand for employees who receive wages or a salary.

Someone can be both an employee and self-employed. For instance, someone works 9 to 5 for the local pet shop and is pet sitter by night and weekends.

I have received many questions from former W-2 people about receiving unemployment compensation and how it impacts self-employment. And vice versa. Here are two typical emails followed by my response.


Hi -
I have an odd question... I was laid off from a tv station in June 2007.. got unemployment for 20 weeks - when it ran in December of 2007 I was still unable to find full time work but did pick up
several short term (independent contract) gigs last year.

I got notice that unemployment insurance was extended in June 2008 but since I had some short term projects I didn't enroll. When those projects dried up - I did enroll and am back on Unemployment Insurance extended for the next 20 weeks.

My question is: When I do my taxes for 2008, if I file as a self-employed will that create a problem with the current unemployment that I am collecting?

Just not sure what to do.
Dee


June --

I am from Portland, Maine. I am a graphic designer/editor. Just started as an indie.

My question is with regard to unemployment insurance, taxes and self-proprietorship. When I was laid off last year, I began to collect unemployment insurance. This year, I have started an indie biz as a freelance designer/editor. I have a small amount of money coming in, but it does not cover my start-up and operating expenses.

Can I continue to collect my unemployment insurance payments while I get the biz off the ground?

What are the tax implications of this?

My unemployment benefits will run out before the end of the year. Is it possible/advisable to postpone payments from clients until the benefits run out, and if so, how do I report it on quarterly estimated tax payments?

Michael
Portland, Me


Unemployment Compensation -- let's call it UC -- is a benefit provided by both the federal and state governments. That means that the Feds as well as each state has a say in how it is regulated.

The intention of UC is help W-2 people who are temporarily unemployed due to work-related circumstances which are beyond their control.

Typically state laws require that someone requesting UC meet the following conditions:
** is not currently employed
** is able to work
** is available for work
** is actively seeking work

If you are self-employed you are you own employer. That means that even though you may not be making any money you are working. You are currently employed by yourself. So you are not currently unemployed.

An odd job to pick up some money does not make you a self-employed in business. Read these posts being self-employed for more info.

Your circumstances and your state's laws determine which conditions must be met.

For instance, if yours is a temporary layoff from your job and you have a reasonable expectation of being recalled, you may not be required to seek work.

If the work you did is no longer in demand, and you are not trained to do anything else, the state agency may provide you with vocational training and your work search requirements may be waived so that you may collect unemployment while going to school.

And, some states will pay UC while you start a business of your own.

Call or log onto your state agency and get an explanation of the benefit requirements. Know before you act so that you don't mess up.

Tax treatment for indies, whether on or off self-employment, is the same. One does not alter the other.

June

Need to feed the kids? Freelance AND work a job.

June,

I was reading your site. Great info!

I have a question. I've run my own business for almost four years. Due to the economic downturn, I've sent my resume out a few places. I have a job offer that I am considering with a firm...I don't really want to work for someone else, but the kids need to eat.

A few questions:

1. I intend to keep my other business going...I have a few commitments and can't shut it down completely. Will having most of my income W2 prevent me from taking normal business deductions?

2. The job offer is ok, but there are no benefits at all. I want to keep deducting my health insurance premiums through my business. They say there is some kind of group plan I can get into, but I'd have to pay 100% of the premiums...so they pay nothing. Can I still deduct health insurance premiums through my business?

Please advise,
Steven
Albuquerque, NM


Dear Steven,

Glad you like my site. Thanks for letting me know.

Yes, you may work as an employee as well as freelance as a self-employed. Amount of income from each is not a factor as long as you are trying to make money as a self-employed. You may still deduct all your indie business expenses against your self-employed income even if it results in a loss. That loss would be deducted from your W-2 income.

You may not deduct health insurance premiums as a self-employed if your employer provides a group plan, even if you pay 100% of the premiums. If you continue to have insurance on your own as a self-employed you may deduct the premium cost as an adjustment to income on your tax return.

-- June

Working for yourself by any name is still self-employment.

June --

Advertising; New York, NY; 8 years.

What is the point of registering as a sole proprietor business (thus paying self employment tax) versus just being a freelancer and paying regular taxes on 1099s?

All of the sudden there's an item on the tax return that has me paying $13k in self employment tax - beyond the regular taxes!

Should I just forget the "company" and just be me? (FYI, there are no employees in the company - it's me).

Many thanks.
Katie

Oh, Katie, you are so mixed up!! Read this response carefully and also check out and read some of my posts under business entity and here employee vs. self-employed

First of all: A sole proprietor and a freelancer are the same thing.

Your choices are: Employee or a self-employed. There is no middle ground where you work for yourself but pay no self-employment tax.

"Company" does not have a specific meaning.

Whether you call yourself a 1099 worker, sole proprietor, freelancer, subcontractor, free agent, or or independent professional you are self-employed. As a self-employed you are subject to self-employment tax.

If you work as a self-employed and do not form another business entity such as a partnership or a corporation then you are a sole proprietor. You do not need to register as one. You are one. And no matter what term you attach to your self-employment, be it freelancer or 1099er, you must pay self-employment tax!

-- June

Self-employed? Determined by facts, not choice.

June --

I am a software engineering consultant working as a W-2 hourly employee of a consulting company. I am on assignment at an insurance company. I report my hours to the consulting company, they bill the client, and give me a paycheck. I make currently make $54/hour. I receive medical benefits and 401(k) benefits (up to 3% match).

I am wondering if I can switch to a 1099, with the consulting firm contracting the work out to me as a subcontractor? I would bill the consulting firm, and they would bill the client. Is this allowed since I am already on assignment at the client. The billing relationships would change, but I would be doing the same work.

Dee
Alpha, Ohio



Hello Dee,


Whether you are self-employed or an employee is determined by the circumstances of your work relationship. It is not a matter of choice or changing the billing method.


You are an employee. Take a look at my post Employee vs. Self-employed .


-- June

What do an options trader and a stay-at-home mom have in common?

Hi June,

I ran into a problem while making a high end purchase that I hope you can help me with.

I am unemployed and living off the option trading I do each month in the stock market. If I am right, living off investment income does not mean I am self-employed even though it is my only source of income. If that is the case, and I hope it is, what do I list on a credit application for employer?

Do I still say self-employed since I am making more money than when I worked at a full time job or do I list “none” and get rejected?

I appreciate the help and enjoy your web site even if I am not officially self-employed.

Thanks,
Bob
Whitehall, PA


Hello Bob,

Correct. Living off investment income is not the same as being self-employed. It's as different as a jazz musician and a trust fund baby. Take a look at Trading stock options is not self-employment on this blog.

Unemployed is not the same as self-employed, although there may be a few similarities. Let's see ... you determine your work or non work-hours, nobody pays you for sick days, income is never definite.You are not self-employed. You are not employed. You don't have an employer. You have no earned income. Your situation is similar to that of a stay-at-home mom when she tries to get a charge card or other forms of credit in her own name.

You say you make more investing that you did at a regular job. You don't say what is your "high end purchase." If you're trying for a mortgage you may need to request a non-income verification loan. Then the bank will look at your assets rather than your earned income. Or, depending on your asset value, there's always a margin loan.

Best,
June

Regulations determine whether you are self-employed.

Hi June,

I found your website and find the info quite helpful...thanks!!

My wife and I have a situation at hand that will require a decision for her to remain a PRN Physical Therapist (employee) or a contract therapist (self employed).

The agency is going to straight contract and phasing out the PRN option...so, she really does not have much of a choice if she wishes to remain with this company. She currently gets no benefits from the company in regards to vacation, PTO, 401K, etc....strictly wages. She does get mileage reimbursement, which is only 0.36/mile vs the gov rate. She typically sees 32-35 patients per week @ $60/ea or ~2k gross/week. She also typically puts ~600 miles/week on the vehicle. At the moment, they want to switch to contract therapists and pay the same amount (60/ea) WITHOUT the benefit of mileage reimbursement.

Although educated, I do not know the "ins and outs" of which is more advantageous.

I have read your advice links and wonder what your opinion is in regard to this case.

And thanks for the wealth of information on your website.

Sincerely,
Brent from Louisiana


Dear Brent,

You are welcome. Pleased my info helps you.

Employee or self-employed is not an arbitrary decision. Conditions must be met by the worker -- your wife -- and the person or agency for whom your wife works.

If your wife has been an employee the agency and none of the working conditions have changed the agency cannot simply change her worker status. Call your local Department of Labor if the agency insists.

You should also read these posts employee vs. self-employed for a better understanding of the requirements and conditions required for self-employment.

Best,
June

Check out my book Self-employed Tax Solutions. It will simplify your tax and financial life, and save you money!

Indies: Learn the difference between self-employed and employee!

June --

I am considered self-employed; however, I was issued a W-2 rather than a 1099.

Will this be a problem when I file my income tax?

Thanks!
Brenda from New Bern, NC


Brenda, It's a big problem!!

Read these posts on 1099s and also these posts on employee vs self-employed.

-- June

Wife Helps Plumber Husband

June --

We have had a plumbing business for 3 years.

My husband does the plumbing and I do all the scheduling of jobs, and bookkeeping. We have no employees. We each take a salary, this year our tax preparer wants me to do a W2 for myself and my husband, I'm not sure about this. Wouldn't this put us in the category of a employee?

Diane in Payson, AZ


Oh My Goodness!!! Diane. If you are giving me the straight scoop -- meaning you are accurately telling me what your tax preparer said, then there is a whole lot wrong here.

Since you did not say that you are incorporated I assume your plumbing business is your husband's sole proprietorship. He cannot be his own employee in a sole proprietorship and so he does not get a salary and would not get a W2.

If someone is an employee then certain registration must be done at the start of the employee relationship. And various payroll forms must be filed with the feds and often the state as well during the year. You don't decide at the end of the year, oh well, guess I'll do a W2.

You need to talk with a tax professional who knows what she's doing. Perhaps your local Small Business Development office can help you.

Best,
June

Forced to be an employee!

Hi June:

I hope this note finds you well.

I consider myself lucky to have found your site on the web -- it seems like a terrific resource.

In all cases, here is my situation. I formed a Limited Liability Company (that is treated as a Schedule C for tax purposes) about two years ago to perform technology consulting services. I have since enjoyed a fair amount of income, expenses and profit through a variety of projects.

One of my newest clients, for a very lucrative project, refuses to pay me on an invoice basis, based on what I consider an irrational fear of becoming responsible for some kind of tax liability by my being reclassified as an employee. I will likely not prevail against this perception without losing the client altogether. Basically, I'm being offered a paycheck/W2, or no contract at all.

So here is my question-- As you can imagine, this is not an ideal situation -- is it better for me to just walk away, or can I fix this somehow on the "back end" on my return at the end of the year or through creative accounting? I am most certainly going to incur unreimbursed expenses for this project (which is located in another state). What options will I have to offset those unreimbursed expenses, along with my other, general business overhead against income received on a W2?

Will the IRS use their W2 to make a case that I am not self-employed after all, and cause all my business expenses to be disallowed?

Can my income by W2 be offset by a loss on my schedule C?

What are your comments?

Best: Tom from Wheeling, WV


Hello Tom,

Yes, your note finds me well. Thank you for asking. I have just returned from several weeks in New York and New Jersey, seeing clients and family. I flew out of an 8 degree Santa Fe and landed in a 59 degree Newark, NJ!

You situation is not unique. Just another example of indies not being taken seriously and/or businesses and their tax advisors not being aware of the tax regs as they apply to indies. If you can deal with not taking this client -- don't. If you must here's the situation:

** You must separate W2 expenses from indie expenses. That includes phone, computer, software, publications -- everything!

** Depending on your tax picture -- high income or no kids or no mortgage -- you will probably lose the deductibility of any expenses against the W2 income.

** If that is your only client and that client takes up much of your time the IRS could very well question your independence.

** Yes, a loss from a your indie business [Schedule C] may be deducted against any other income.

Best regards,
June Walker

Jazzercise Franchise

Hi June,

I stumbled on your site while looking for self employment tax info and found the article pertaining to whether a person is an employee or self employed. I read that it is about the relationships.

Well, I am a franchisee without owner status. The students pay the owners and the owners pay me a set amount per class. The owners decide which times and days I can teach, I am given music and choreograph notes and DVD's from Jazzercise Inc. to follow with approved routines. I cannot make up my own. Corporate determines how long my class is, the structure of my class, and even how long I can stretch in between routines. I am monitored for compliance once a year by Corporate and failing would mean termination. They require that I have CPR certification and pay liability insurance or again termination would ensue. The owners pay the rent, decide the class fee, maintain the membership, and promotions and all advertising. I own my microphone, because I choose not to use theirs, they own the mixer, speakers, weights, and mats that both I and the students use. I do not have my own business cards and had to sign a no compete document so that I cannot teach another aerobic format anywhere else.

Should I be filing self-employment tax? My owners do not give me any tax forms to file, even when asked. I did get the grand total of earnings for the year in writing after much prodding, (the total being $5730) and they do not report income paid to me to the IRS. What do you think? I believe I have the option of getting paid a percentage of the center instead of a base rate. Would that make a difference? So again, employee or self employed?

Thank you in advance for all your help!

Carol from Oregon


Hello Carol,

Franchise laws have different elements than those for indies. There are many questions in your email and your situation is too specific for a general response.

Here's a site that might point you in the right direction. It is from Jazzercise explaining its two franchise types:
http://www.jazzercise.com/become_franchise.htm

I assume you would have entered into a franchise with the advice of an accountant or attorney. You should contact that pro and get your situation cleared up. And maybe there are some Jazzercise folks who will read this and pass on some info to you.

Best,
June