Belated tax confusion

May 19, 2011 10:07 PM

Why did I seem to pay much less taxes as an independent contractor vs. a regular employee, making roughly the same hourly wage?

I work in the green industry, and last year worked as an independent contractor for a local farm. Boss said I would work as an independent contractor to save him the hassle and paperwork of making me a regular employee. So I never had any taxes taken out of my checks. When it came time for taxes this year, I actually got money back from the fed (through some govt. program), and only had $200 due to the state. I would say I made roughly $6k working for this business.

I'm now working as a full-time employee for a nursery. I've already made close to $6k working there, making only a slightly higher hourly rate, and have well over $1500 taken out of my paychecks in taxes. This is more like what I thought my tax obligations would be when I filed my 1099 in April.

Could someone make sense of this for me? I can't remember the name of the federal program which got me the refund this year, but it was some sort of low-income deal I believe. Either way - if my income is similar it doesn't explain the discrepancy.

Thanks! I feel dumb

posted by anonymous to work & money (6 answers total)

You probably benefited from the Earned Income Tax Credit last year.

This year either you're making too much money to be expected to qualify for the EITC again, or your withholding is too high and you'll get a big refund back.

The income isn't similar if you made $6k all year last year but you've already make $6k so far this year, as you're expected to continue earning at that rate for the rest of the year (and thus would end up grossing close to $18k total if you do). So last year you paid taxes on $6k, but this year you're expected to pay taxes on $18k.
posted by Jacqueline at 10:19 PM on May 19, 2011 [2 favorites]

As an ind. contractor you should have been paying more, since you are self-employed and your employer isn't covering their half of payroll taxes.

Did you prepare your taxes yourself, or have someone do them for you? If someone prepared your taxes for you, they may have deducted the costs related to yourself as a business, among others. Either way, look over the forms from last year and see if you filled any forms out that were related to any sort of credit and check to see what was deducted.
posted by This_Will_Be_Good at 10:20 PM on May 19, 2011

Might you have just done your taxes wrong last year? Barring that, it's easier to take business deductions from 1099 income than W-2 income, so you may have benefited from that as well.

But what's most likely is that you're just doing what most people do, i.e. lending the government money for free. No taxes are deducted from 1099 income, so unless you made estimated payments, the money you "got back" was really just a tax credit, not a refund. But unless you use your W-4 to indicate otherwise, the default withholding position is to have your employer make withholdings as if you weren't going to make a single deduction--even the personal exemption and standard deduction!--which means unless you go out of your way to do otherwise, you wind up paying more taxes than you're going to wind up owing.

This is why most people get a refund at the end of the year when they would be better served by being a little smarter with their W-4 and keeping that money for themselves. Even sticking it in a savings account is more useful than letting Uncle Sam have it for a few months.

Sit down with someone who knows what they're doing*, crunch your numbers, and come up with a better number for line 5 on your W-4. Given that you've likely been overpaying for the past five months, you may be surprised at how low your withholdings are for the rest of the year.

*An accountant or certified tax preparer, preferably.
posted by valkyryn at 5:52 AM on May 20, 2011

As above, but you should also look to see if you could have claimed business use of home, since you probably needed to do work there at least some of the time. That and other business expenses could have reduced your taxes payable.

FWIW, you should usually negotiate higher pay for being a contractor, since you are losing out on benefits, job security, training, etc.
posted by acoutu at 9:48 AM on May 20, 2011

Did you forget to pay self employment tax?
posted by Bunglegirl at 10:06 AM on May 20, 2011

You're comparing apples and oranges. The apple is last years tax bill paid in April, and the orange is what is being taken out of your paycheque right now. Wait until you do your taxes for this year and then make the comparison. One possibility is that your employer is taking too much out and you'll get an even bigger refund this year.
posted by pwb503 at 11:40 AM on July 22, 2011