cfo
DEPT
by Chase Insogna
BEING
TAX SMART
Helping Your 1099s
Keep More Money
Those who hire independent contractors reduce a company’s overhead because contractors pay their own payroll taxes and their
own benefits. These contractors are often
a part of the trusted support network that
grows companies. And yet, many independent contractors are heavily in debt with the
IRS.
Surprised? These are the same people
who have a good lifestyle but find themselves owing tens of thousands of dollars in
federal (and possibly state) taxes. To add
even more stress to their situation, every
contractor knows at any moment, unlike an
employee with more job security, the checks
can stop coming and they can be out of
work overnight.
A few business lessons in corporate
structure from those who employ 1099 contractors will go a long way in keeping those
trusted associates part of the organization.
The Vicious Cycle Begins
In many industries, 1099 contractors are
paid a lot of money and for the most part,
that income goes unnoticed at the IRS until
a 1099 is issued.
Come tax time, the visit to the CPA can
sound like this: “You’ve done really well
for yourself. I see you were paid under your
Social Security Number, so you’re going to
be paying more taxes when you file your
1040 this year.”
For the 1099 contractor, the inevitable
question follows: “How much do I owe this
year?” Now, reality sets in because many
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Texas CEO Magazine
have made and spent $150,000 over the
year and there’s a $48,000 federal tax bill
due. Most have a few thousand in the bank,
if that much.
The second reality? That’s just the beginning because most 1099 contractors are
still working for the same money in the new
year and should be paying quarterly estimated taxes to the IRS. If the estimated tax
liability is $12,000 per quarter (calculated
from the previous year’s tax return) and is
due by April 30 – on top of the $48,000 due
on April 15 – a vicious cycle has begun.
Educate Your Contractors
To maintain a strong and healthy independent contractor workforce, companies
should help educate their contractors on the
tax consequences and benefits of incorporating. Yes, incorporating. Those who hire
1099 contractors know the tax benefits of
Discuss. Learn. Lead.
structuring an entity in the most tax efficient
way possible. Most contractors have no idea
about keeping track of expenses throughout
the year to lower the tax liability, much less
have the knowledge that becoming an LLC
and electing that LLC to be taxed as an
S-Corp would save (on average) between 1620 percent in federal taxes each year.
Talking with a CPA should begin with a
review of entity structure. For those contractors who use a Social Security number
instead of creating an Employer Identification Number (EIN# and are taxed as an
S-Corp), they will see more of the contractor’s hard-earned income being given to the
IRS. The most e