Hi, for this tax year I filed exempt because I am a student. I am filling out an W-9 form right now for a freelance project, does this mean I put an exempt payee code?

[makviv000]

If I quality for an exempt payee code, which one would it be?

[DanaB27]

No, the exempt payee code does not apply to you. Only the following entities qualify:

1—An organization exempt from tax under section 501(a), any IRA, or a custodial account under section 403(b)(7) if the account satisfies the requirements of section 401(f)(2)

2—The United States or any of its agencies or instrumentalities

3—A state, the District of Columbia, a U.S. commonwealth or possession, or any of their political subdivisions or instrumentalities

4—A foreign government or any of its political subdivisions, agencies, or instrumentalities

5—A corporation

6—A dealer in securities or commodities required to register in the United States, the District of Columbia, or a U.S. commonwealth or possession

7—A futures commission merchant registered with the Commodity Futures Trading Commission

8—A real estate investment trust

9—An entity registered at all times during the tax year under the Investment Company Act of 1940

10—A common trust fund operated by a bank under section 584(a)

11—A financial institution

12—A middleman known in the investment community as a nominee or custodian

13—A trust exempt from tax under section 664 or described in section 4947

[Opus 17]

You are never exempt from income taxes unless you fall into a legal exception. Being a student does not make you exempt from income taxes. It is just that often, a student‘s income is too low to trigger income taxes. If your income is less than the standard deduction of $12,400, you won’t owe any federal income tax but that doesn’t mean you are exempt. It just means that your deduction is larger than your taxable income.

You should never claim exempt even on a W-4, even if you are a student and even if it is a low income job. The withholding system is designed so that you will have the right amount of tax withheld.

With an independent contractor job, you will owe 15% self-employment tax on your net profit after expenses even if your taxable income is low enough that you don’t owe income tax.  (And if you don’t know the difference between income tax and self-employment tax, you were going to learn pretty soon.)

[makviv000]

@Opus 17 

I see, I should not file exempt even if I do not work and I am a student? Why is that?

“And if you don’t know the difference between income tax and self-employment tax, you were going to learn pretty soon” I actually don’t know the difference if you cared to share any helpful resources or information!

[VolvoGirl]

A W9 form is to give someone your ssn for self employment income.  At the end of the year they will give you a 1099NEC form instead of a W2.  They don't take out any withholding on W9 and 1099NEC.  So if you plan to make a lot you need to pay quarterly estimated payments to cover the self employment tax and regular income tax on it.

Some general info on self employment...........

You will need to keep good records.  You may get a 1099NEC at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small.  You might want to use Quicken or QuickBooks to keep track of your income and expenses.

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed  return....

http://quickbooks.intuit.com/self-employed

When you are self employed you are in business for yourself and the person or company that pays you is your customer or client.

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax.  You will need to use the Online Self Employed version or any Desktop program but the Desktop Home & Business version will have the most help.

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

You pay Self Employment tax on $400 or more of net profit from self-employment.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

[Opus 17]

---

@makviv000 wrote:

@Opus 17 

I see, I should not file exempt even if I do not work and I am a student? Why is that?

Students are not exempt from income tax.  If you have no tax withheld, and then owe tax at the end of the year, you can also be assessed a penalty even if you pay in full, because you are supposed to be paying into the tax system throughout the year.

For a single person, your first $12,400 of income is tax-free, so about $250 per week.  If your pay is less than that, the withholding should be zero even if you select a non-exempt status on the form (like single with no allowances).  If your pay is more than $250 per week regularly, then you will owe tax at the end of the year since your total would be more than $250, and you would want tax withheld.

---

@makviv000 wrote:

“And if you don’t know the difference between income tax and self-employment tax, you were going to learn pretty soon” I actually don’t know the difference if you cared to share any helpful resources or information!

---

When you are self-employed, you are required to keep accurate records of your income and expenses, even if you don't get tax paperwork from your payers.  You report your income and expenses on a schedule C, and calculate the net profit (net income).  That income flows to your main form 1040 where it is combined with your other income, deductions and credits to calculate your overall income tax.  The business income also flows to schedule SE, to pay self-employment tax.  This is about 15%, and represents 12.4% social security tax and 3.9% medicare tax, minus a small adjustment.  When you are an employee, you pay half these taxes—6.2% and 1.45%—and your employer pays the other half.  When you are self-employed, you are the employer too, so you pay both halves.

So let's consider where you have $6,000 of income from a job and $6000 self-employment income. Your taxable income for income tax is $12,000, which is less than the standard deduction so you owe no income tax.  But your taxable income for SE tax is $6000, so you owe about $900 of SE tax, making your overall tax bill $900.