“Mom, what’s a W-9?”  1099-MISC, W-4 Exemptions & More

It’s summer job time, time for new grads to find jobs, and it’s always a good time to take a better job!  But navigating the shoals of new hire paperwork can be hazardous.  I got this question just a couple of weeks ago from one of my own kids!

When you’re hired on at a new job, you normally have to fill out a W-4 and an I-9.  The first (and the state equivalent) require you to designate your number of exemptions for the income tax withholding calculation.  The latter, with your ID, proves your legal authorization to work in the U.S.

But sometimes you’ll be presented with a W-9 requesting your Social Security Number instead of a W-4.  Beware!  This employer is treating you as an “independent contractor” – a self-employed person – and will not be paying employment taxes or withholding income taxes for you.  They won’t be carrying workers’ comp insurance or providing any other benefits.  You will receive a 1099-MISC in January rather than a W-2.  If you’ll be making more than $1,000 or so, you could be in for a rude shock when tax time comes.

What are your options if you’re being treated as self-employed?

  • IRS and the states have rules about who qualifies as an independent contractor. There are 20 “tests” (here) but they add up to who controls the conditions of your work – the employer or you?  When do you work, where do you work, who decides how the work is done, whose tools & equipment are used, do you have a professional license/experience or do they train you, do you provide this service to multiple firms?  Are you paid for the work you accomplish – or hourly like an employee would be?
  • If you’re incorrectly classified, you can file the SS-8 with the IRS, and in the fullness of time you will receive a determination. Your employer will be in trouble, and you can count on being fired.  So for practical purposes, the only alternative if you want to retain the job is to put money aside and either pay quarterly estimated taxes or expect it to eat any other refund to which you’re entitled.  You’ll need to pay approximately 15% in addition to your income tax (on the first $118,500), but you may be able to deduct some business expenses.
  • Best to consult a professional, or use a calculator like the one here to make sure you won’t owe. You can make quarterly payments online at irs.gov, or mail them to IRS in April, June, September & January.

If you *are* an employee, fill out your W-4 with care.  Basically, one exemption covers the standard deduction and personal exemption for a single person with one job.  If you itemize deductions, or have children (especially under 17), qualify as Head of Household or for Earned Income or other credits, you can increase it to 2 or more and have less tax withheld.  If you’re single with one job, you can safely use the worksheet on the W-4 form.  If you want a higher refund, reduce your exemptions to zero or add an additional dollar amount of withholding per pay period.

Common W-4 traps include:

  • Married couples – claiming Married can often mean owing, since the tables essentially assume you have a non-working spouse at home. If both of you have good incomes, beware. You may need to file as “Married but withhold at higher single rate.”  Consult a professional or use a comprehensive W-4 calculator like this one at irs.gov to make sure you won’t owe.
  • Multiple jobs – if you work more than one job, each payroll calculation assumes that it’s all your income. But that $5,000 or $10,000 you make at your second job is taxed at your marginal (top) tax rate, which may be 25% or higher.  Again, consult a pro or use a calculator to adjust your exemptions; set them at Single – zero, and add a fixed amount, or see if your employer will withhold a flat percentage that corresponds to your top tax rate.

Remember, you must report all your income, even if you don’t receive a reporting form.  If you do receive one, IRS will be matching to make sure you report.  If you work in someone else’s home – providing childcare or other services – then you may be a household employee.  Your employer is required to withhold and pay employment taxes.  You can refer them to this info.

As always, call 513-794-1829 or email clare@1taxfinancial.com for a FREE consultation if you have questions.


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