Archive for July 2017

The New Shared Economy – Where Anyone Can Start A Business

We all know the famous tag-line “there’s an app for that”, but in this day and age it seems that apps themselves have evolved from just games and time-savers to ways for anyone to make money on the side(some of which can actually become full-on business ventures that replace your job). They come in all shapes and sizes from ride-sharing(examples Uber and Lyft) to home-sharing(examples AirBnB and VRBO) to getting a handyman to do chores around the house(example: Takl).

Did you that there’s even one where you can make extra money renting out your personal vehicle? It’s called Turo and I know it very well as I used it to rent my dream car, a Porsche 911 C2S:

Much like my favorite car company Porsche, the economy itself, is evolving(Read: Formula E: Porsche to enter team in 2019, ending Le Mans involvement). Now I know some will say “but hasn’t the 911 had the same exterior design for over 50yrs?” And yes, you would be correct. The 911 is the embodiment of what your mom used to always say “beauty is on the inside” and Porsche engineers have made thousands of improvements on the driving experience over the years that your average Joe won’t see and won’t believe until you actually drive one.

This leads me back to the topic at hand “experience”. It seems with this shared economy anyone with a smart-phone or a computer can sell an experience. Whether it’s a room to stay on a long trip through California(I did this recently), a ride to the airport(also did recently) or as evidenced above, a thrill ride in a dream car.

With all of this though there’s that dreaded consequence – TAXES.

All of this IS income and don’t fool yourself into thinking otherwise! Even worse so it’s that awful type of income that is paid on the dreaded Form 1099 Misc where none of your taxes are withheld(vs. your employer who is nice enough to pay half of your FICA taxes and with-holds the rest as well as allows you to with-hold state and federal income taxes as well).

In addition since most payment is done by credit / debit nowadays if you have your own account like Square Register, Paypal or a bank merchant account you will get a 1099-K form for all of those transactions. (Don’t forget that any cash received is also reportable, you don’t want to be like Nick’s Roast Beef, a staple in the Boston area and example of a successful “mom and pop” that was targeted by the big, bad IRS because they thought cash was not reportable and had to go through an expensive and stressful audit which included an indictment on 17 federal crimes!)

Some feel a 1099 is preferred as you can quote “deduct everything”, but WARNING – YOU CAN’T! Please don’t make the mistake of listening to what your friend who rents his house out on AirBnB, drives for Lyft, rents his second car on Turo and does household chores on Takl does because he supposedly pays no taxes as this poses the obvious question: “Where will he be when you get audited?”

Additionally, to that “CPA”(a loose term in the “shared economy” that seems to be what everyone uses for their “tax preparer” when in reality it’s a specific term for an actual license granted at the state level to accountants who meet specific requirements and NOT all tax preparers are CPAs, then again, not all CPAs do taxes either) who says “don’t worry, you can deduct all of this”¬†please do yourself a favor and RUN: Far and Fast! Back to good old mom, “if it’s too good to be true, it probably is!”

Being paid on a 1099 for sharing your home, giving someone a ride, doing a chore around the house or even renting out your car is just like any other business – some items are deductible and some aren’t. To truly know what is you need the help of a tax professional.

I hope you enjoyed this article or were at least informed, either way please share your opinion in the comments section below.

Finally, if you are benefiting from the shared economy and want to know how it affects your taxes, even if you’re only doing it on the side of a well-paying W2 day job please call us at 623-240-9545 or email at info@jeffersonfranklintax.com and we’ll make sure you stay ahead of the game in the new economy!

W2 or 1099 – The Painful Truth for the Wrong Answer

In today’s economy the question of “Am I an employee or independent contractor?” comes up quite frequently. This is also true for employers themselves as there are several types of tax that an employer must pay if the people performing work for them are deemed employees as opposed to an independent contractor.

Such examples are Social Security and Medicare Tax(FICA), Federal/State Unemployment Tax(FUTA) and Worker’s Compensation coverage. Additionally, a reason for employers’ motivation to mis-classify an employee is the compliance requirement for offering fringe benefits. At the end of the day a mis-classification can cost an employer – BIG TIME.

Under IRC 3509 if an independent contractor is deemed an employee the employer is subject to not only paying the employment taxes, but an additional 1.5% of the wages paid plus 20% of the employer’s share of FICA taxes(7.65% of wages paid).

An example of penalties assessed can be seen with a mis-classified contractor being deemed an employee who was paid $40,000 in 1 year. In addition to having to pay the employer’s share of FICA(7.65% or $3,060) and FUTA(0.6% or $42) the additional taxes of 1.5%($600) and 20% of the FICA($612) are assessed for a grand total of $4314.

For the employee themselves there’s the added pain of not having taxes with-held and having to pay both Federal and State(if applicable, remember, 7 states do not have an income tax) as well as their share of FICA.

The next question that arises is – why on Earth would an employee want to be paid on a 1099?

Simple – they can deduct work related expenses they wouldn’t otherwise be able to while being paid on a W2.

Back to our example of a worker being paid $40,000 for the year vs. contractor netting $40,000 in gross income to $30,000(75% of gross which would be the result of a lot of unreimbursed expenses- i.e. vehicle costs, cellphone/internet, etc) the difference is as follows:

Employee pays – $4824($3988 Fed + $950 AZ) or $5406($3988 Fed + $1418 IL)

Contractor pays –¬†$6970($2165 Fed + $4239 SE Taxes + $566 AZ) or $7368($2165 Fed + $4239 SE Taxes + $964 IL)

As you can see having to pay the full amount of your own FICA taxes(known as Self-Employment Taxes) makes a huge difference and can be quite painful when you find out that balance due in April(while your employee friends are going on fancy vacations or buying new electronics with their large refund checks).

At least when you are an employee your employer normally has the Federal and State income withheld so come tax time you are usually looking at a small balance owed or even a refund. This does not even take into account under-payment penalties that would be assessed in addition to those balances above if you did not make estimated payments through-out the year.

Since taxes are such an individual situation with many variables it is best to talk to your income tax professional to find out 1) are you an employee or contractor?, 2) what tax strategies can you incorporate to keep more of your hard-earned money?

This goes for employers as well, as evidenced by the excess costs that can be assessed if you mis-classify your employees as contractors.

If you want to avoid the pain of excess taxes and penalties, please give us a call at 623-240-9545 and we will provide you with the relief you need!