My wife receives a 1099-MISC form and her paychecks are untaxed. Is this legal? She is not an independent contractor.

[BMcCalpin · Accepted solution]

If your wife received a 1099-MISC, then her "employer" is treating her like a contractor. If she were considered an employee, she would get, as you know, a W-2.

Employers do not withhold any taxes for contractors; the contractor is responsible for paying all income and self-employment taxes.

A major reason why employers do this is to avoid contributing their 7.65% share of the Social Security and Medicare taxes (the contractor pays the full 15.3% on Schedule SE).

You will want to read "Understanding Employee vs. Contractor Designation" at the IRS website. Note that at the bottom is a link to contest your "employer's" determination that you are a contractor.

[ronkimd]

My wife and her friend are the only nurses.  They make the most money and they are the only ones receiving a 1099-MISC form.  Shouldn't the other employees receive one as well?

[VolvoGirl]

We don’t know.  This forum is to help prepare your personal tax return.

[macuser_22]

That would be between your wife and her employer.  All we can tall you is if she received a 1099-MISC then she is self-employed in the eyes of the IRS and must pay the both the employees and employers share of the SE tax and income tax.    Since there is no tax withholding for self-employed persons, to avoid under payment penalties probably quarterly estimated tax payments should have been made.

[macuser_22]

You asked if it was legal?   Maybe - Maybe not.  See this IRS article on that subject:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation">https://www.irs.gov/n...>

It can be challenged if misclassified by using the SS-8 form, but employers receiving such a challenge often decide that they no longer need the services of that person.

[BMcCalpin]

ronkimd, the comments by Volvogirl and macuser_22 are all things you need to consider. Yes, a contractor must file Schedule C and pay self-employment taxes on Schedule SE (this is done automatically when you enter the data for Schedule C, your sole proprietorship, which is what a contractor is. Whether or not the IRS would determine that your wife is an employee or contractor is a question of fact that would have to be determined by the IRS. And I have heard, as macuser_22 indicated, that people who dispute their designation find themselves out of work - legal or not.

You said something interesting - "They make the most money". Normally, contractors are paid more than employees. Why? Because reputable employers know that contractors have to pay for their own benefits and own self-employment taxes. Is it possible that your wife is paid more (in gross) than comparable nurses who are actually employees in your area? For example, if an employee is paid $30k a year (about $15 per hour), a contractor doing a similar job would be paid (in gross) maybe $40k-$45k per year (about $20 to $22.50 per hour), to cover the extra costs that a contractor has.

We can't make a decision for you, but we hope that our comments help you to better understand the situation you are in.

[VolvoGirl]

Then she is being paid as an independent contractor or freelance.  She is self employed for it and has to report it on schedule C.

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.

For the future, 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

You need to report all your income even if you don't get a 1099Misc. You use your own records.  You are considered self employed and have to fill out a schedule C for business income.   You use your own name, address and ssn or business name and EIN if you have one.   You should say you use the Cash Accounting Method and all income is At Risk.   

After it asks if you received any 1099Misc it will ask if you had any income not reported on a 1099Misc. You should be keeping your own records.  Just go through the interview and answer the questions.   Then you will enter your expenses.

Self Employment tax (Scheduled SE) is automatically generated if a person has $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.  You do get to take off the 50% ER portion of the SE tax as an adjustment on Schedule 1 line 27.  The SE tax is already included in your tax due or reduced your refund.  It is on the Schedule 4 line 57.  The SE tax is in addition to your regular income tax on the net profit.

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 can enter Self Employment Income into Online Deluxe or Premier but if you have any expenses you will have to upgrade to the Self Employed version.  How to enter self employment income
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