TXT-tech tax? Thx.

January 14, 2009 1:08 PM

How do taxes usually work for a small part-time "independent contractor" gig?

I'm a college student who was recently accepted as an "independent contractor" for a prominent text-message answer service (think ChaCha or kgb). How it works is I spend a few hours a week fielding questions texted to the company thru an online interface. I answer it to the best of my abilities, and if it's satisfactory I garner 5-10 cents.

This is, embarrassingly enough, my first part-time job, and I'm wondering what the tax situation would be for something like this. They're requiring me to submit a W-9 and bank account info, but make no mention of anything beyond that. I've done a little (very little) research on independent contracting, and it sounds like it should be more complex than that. This site for example suggests I must register a business, possibly obtain a license figure estimated tax, etc.

However, I'm also getting the impression that "independent contractors" are usually far more professional jobs making a real, full-time wage. Mine is a very part time role making a few cents an hour. Given that, how much am I reasonably expected to do, tax-wise? I know, you are not my accountant, but I don't need detailed advice. It's just that I've never done this before, so I only want to know the minimum filing requirements for a job like this, practically-speaking. If anything else _is_ required, then I'll take it to an accountant. (Also I'm in Alabama, if it matters.)

Posted anonymously to avoid any scary repercussions from the company/IRS. Follow-ups can be sent to [e-mail]

Thanks!

posted by anonymous to Work & Money (9 answers total)

I am not a tax professional. But I believe what you are looking for is a 1099 form.
posted by desjardins at 1:13 PM on January 14, 2009

U.S. tax law requires businesses to submit a Form 1099 for every contractor paid at least $600 for services during a year.

So if you make less than $600 doing this, don't sweat it.
posted by desjardins at 1:14 PM on January 14, 2009

If you do make more than $600, or if the company is just thoroughly scrupulous, they'll send you a 1099 form shortly after the end of the year. You then have to claim this as income in the appropriate place on your tax return, and pay whatever the overly-complex formula says you owe on it.

If you make any kind of money at all doing this, it's a very good idea to put some of it away (25-30%) in an absolutely do not touch savings account, in case you owe taxes on it at the end of the year. You're basically just pre-withholding from yourself. It is a very smart thing to do, and many are the contractors who get in trouble at tax time because they didn't.

If you were going to be making serious or even moderately serious money as an independent contractor, you're supposed to estimate in advance how much you expect to make, and file an estimated tax payment each quarterthrough the year. Then at the end of the year you claim what you really made nd you and Uncle Sam settle up on who owes who what. I was a contractor for many years and never paid estimated taxes. There's a fairly small penalty if you don't. It never bothered me much, compared to the hassle of estimating and quarterlies.

You don't need to incorporate or get a licence or anything like that. And it's probably not worth your money to talk to an accountant for tiny amounts of income.
posted by rusty at 1:28 PM on January 14, 2009

I work as an independent contractor for such businesses and have been doing this for years. That said, I am not a tax professional, and I am not your tax professional, etc, etc. I do prepare my own taxes.

Are you keeping track of how much they're paying you? If you haven't been, start doing it now. You can probably backtrack through Paypal or whatever method of payment you've been using.

If they pay you more than $600, you'll receive a 1099 form. Use this to file your taxes.

If they don't pay you more than $600, you might not receive a 1099 form, but that doesn't mean they didn't submit the information to the IRS under your social security number.

Regardless of whether they send you a 1099 form, you need to report this income on your taxes. You will probably not owe anything if your income is below the standard deduction. You will also probably not get anything back, since they haven't withheld anything. I'm not clear whether you intended to file taxes and were just wondering whether you needed to include this, but if you weren't going to file, you should definitely do so in case they do another tax rebate thing this year.

You should be able to use TurboTax's free file program (do some googling, it doesn't apply to me so I didn't bookmark it).

MeMail me if you want more information.
posted by peanut_mcgillicuty at 1:31 PM on January 14, 2009

Oh, and regarding needing to register as a business--no, you do not. I've been doing this for going on five years and make between four and five digits with my side businesses. I have not incorporated or anything. The services I provide do not require me to protect myself through such legal channels. I do pay self-employment taxes on the money I bring in through independent contracting even though I have a regular fulltime job.
posted by peanut_mcgillicuty at 1:33 PM on January 14, 2009 [1 favorite]

I'm not a tax preparer or accountant, and any tax preparer or accountant would need a lot more information about your specific situation to answer your questions. But in general: The bad news about being a contractor is you will have to pay the employer's and employee's share of the payroll taxes (about 15% combined). Also bad is that the company won't withhold these taxes and remit them to the government, like they would do if you were an employee; you have to pay estimated taxes instead (google that). The good news is you can deduct your expenses in full. You would do this on a Schedule C (google that too), submitted with your tax return. These deductions might include the cost of your computer, internet access, part of your rent to pay for the portion of your living space that is your home office (google home office deduction).

You may or may not want to consult a professional. It probably depends on how much you make. If you make under $600, the company might not even report your income to the IRS (this would be done via form 1099, of which you also get a copy). Any amount you make is taxable income and is required by law to be reported, and you would be a horrible person for not doing so, even if the IRS probably has absolutely no way to find out about it, and you could totally get away with it, definitely report it anyway.

Also, I very much doubt that you need a business license. If you proceed without one, and the authorities find out, and it turns out you were supposed to have one, the punishment (if any) will surely be light.
posted by Dec One at 1:36 PM on January 14, 2009

Hello there! I had to learn all of this the hard way about five years ago, so don't worry, many many many people find themselves in your situation. Here's my advice in handy list form!

- You don't need a business license. You'll state your occupation on one of the forms you have to fill out.

- You don't need to do quarterly estimations (yet).

- If you made more than $600 at this company last year (January 2008 to December 2008) then you should receive a 1099-MISC form. The company is responsible for sending you two copies (one for you to keep, one for you to file to federal).

- If you don't get this by mid-February, bother them about it. By law they need to get you this information before the end of January, but a lot of businesses don't manage to get their shit together until then, so a grace period of a few weeks is normal.

- If you don't receive a 1099, you need to tally up everything you've been paid by your company in the previous tax year. That # is your Total Income. Don't worry too much about making a mistake, as you can rectify over/underpayments in the next tax year.

- Grab the 1040 form & instructions from the IRS site. (NOT the 1040-EZ.) Also grab the 1040 Schedule C and the 1040 Schedule SE. You need to fill out all three, as a lot of calculations get shared between them.

- If you're NOT taking any deductions, you can get away with filling out the Schedule C-EZ instead (which is much, much easier!).

- You can deduct home office costs, but not food (unless they count towards business meetings), gas, or any non-business use of your property.

- You can deduct medical expenses that you paid for out of pocket, but the amount you spent needs to be within a certain range and you can either deduct your expenses or take the standard deduction of $5350-ish dollars. Not both. Choose wisely!

- Are you 25 or older? You're eligible for the EIC (which is referenced on the second page of the 1040 form), which knocks a little bit off the taxes you owe. This can be a lifesaver at times.

- The tax you will owe will be 13-20% of what you made that year, or about two months full pay (averaged out over 12 months). Start socking that away!

- Can't pay your taxes in full come April 15? Don't worry about it. Send in your forms (1040, C, and SE) along with anything you CAN pay towards your owed taxes. There are forms you can fill out to request a payment installment plan. The IRS interest rates are very reasonable (better than paying with a credit card and then having to pay THAT interest rate). Send those in on April 15.

- Don't forgot to do the same thing for your state taxes. Each state has a different system for reporting self-employment/1099/independent contractor income, but the structure is roughly the same. You might need to send your state a copy of the federal C form, as well.

Unrelatedly, I don't know why the company you work for has your bank account information. They don't need that unless you get paid through direct deposit, right? If you don't have that, maybe look into that?
posted by greenland at 2:44 PM on January 14, 2009

@greenland: You're making a lot of assumption's about the OP's tax situation.

- You may have to make estimated tax payments. There are specific requirements that, if met, exempt a taxpayer from this requirement. We don't know if the OP meets any of those requirements.

- There are a LOT of requirements for the home office deduction. Make sure you meet them before claiming it.

- People don't generally deduct the cost of gas, but do deduct their mileage expense (the IRS sets a rate per mile each year). In this case, working at home on your computer, you may not have any mileage expense.

- Being 25 or older is not the only requirement for the EIC. In fact, it's not a requirement at all if you have one or more children. There are income limits and many, many other requirements that must be met before you claim the EIC.
posted by Dec One at 3:38 PM on January 14, 2009

@greenland - the interest rates that the IRS charges are very small, but the penalties for not paying on time will eat you alive. I just got done paying a debt that was originally $6300 and it was closer to $10000 total in payments (over 3.5 years). I guess it depends on what your options are for credit cards.

Also @anon - if you are in a payment plan with the IRS they withhold your future tax refunds to pay down that debt. This may be a good thing and it may not be, but don't let it be a surprise (like I did).
posted by getawaysticks at 12:22 PM on January 15, 2009