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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7434
Experience:  15years with H & R Block. Divisional leader, Instructor
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Im an independant contractor who hires other sub-contractors.

Resolved Question:

I'm an independant contractor who hires other sub-contractors. My income is primarily W-9 income, but I also pay my workers via W-9. Is there any way to restructure my company or operation in order to minimize my tax liability here?

For example, one job paid my company $11,150. $9350 of that was paid to my sub-contactors. By the time I paid taxes on that W-9 income, I was in the hole by several thousands of dollars.
Submitted: 11 months ago.
Category: Tax
Expert:  Robin D. replied 11 months ago.

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
By your statement independant contractor who hires other sub-contractors I was under the impression that you did not have employees.

Robin D. :

If these are sub contractors what taxes are you paying?

Customer:

That's the big question!

Customer:

So all my income is reported by my clients' W-9 forms that are sent to me.

Customer:

But most of that income is spent on sub-contractors.

Customer:

I think what has thrown me is how it is reported in my tax software.

Customer:

For instance, my software keeps a running total of how much I owe the government...

Robin D. :

Have you been treating this workers as employees and withholding tax and paying the employer portion of same?

Customer:

No.

Customer:

All are reported as nonemployee compensation.

Robin D. :

If they are not your employees (and we can go over that in a sec) then the fact that all the amounts are reported to you as wages will work out when you file because what you issue to them by means of a 1099MISC

Robin D. :

is subtracted from your Gross

Robin D. :

You will not be paying tax on the amounts you report as paid to these subs

Robin D. :

that will be an expense that you use when you file

Robin D. :

DO you file a Schedule C

Robin D. :

for your business income?

Customer:

Yes

Robin D. :

Then on the Schedule C you will show the expense

Customer:

Correct, line 11 on schedule C.

Robin D. :

Contract labor includes payments to persons you do not treat as employees (for example, independent contractors) for services performed for your trade or business. This is shown on Line 11 of the Schedule C

Customer:

All of that information shows up.

Robin D. :

So your software is not accounting for the deduction?

Customer:

It doesn't seem to...

Customer:

Here's what happens.

Customer:

My taxes are completely done except for the W-9 entries.

Customer:

(for my sub contractiors)

Customer:

I enter in $9350 paid to an employee, and the amount owed to the Federal gov only drops by $2140.

Robin D. :

First you should not be entering anything under employees. These are contract labor and 1099MISC are issued to them. I know you ask for the W9 because they are US persons and you need theinfo to report but that is as far as teh W 9 goes for these people

Customer:

Yes, sorry. They are not employees.

Customer:

These amounts are appearing on line 11 of Schedule C.

Robin D. :

I think when you are entering "employee" items the amount is only dropping a little because teh program may be still calculating your portion of employer taxes

Robin D. :

If they are appearing on 11 and subtracting out then you would only be paying tax on teh remaining amount

Robin D. :

That would be income and self employment tax

Robin D. :

but just for yourself

Robin D. :

Look at your Schedule C and check to make sure that your line 31 is the true Net Profit

Robin D. :

it should be the Gross less your expenses (with the contractor payments from you included)

Robin D. :

Then I can tell what your SE tax would be on that

Robin D. :

Changing your business structure at this point (even to S corp) may not be the best thing

Customer:

I am set up as a sole proprietor.

Robin D. :

You would then need to file W2 for you because of the requirement to pay a salary and the portion of your employment taxes would need to be paid as well as more filing then you may want to complete

Robin D. :

I think if you want to stay simple

Robin D. :

you shoudl stay as sole prop

Robin D. :

you are only having to file teh 1099MISC to contractors

Robin D. :

your own Schedule C

Robin D. :

and the SE

Robin D. :

S corp, if you restructured woudl be more involved

Customer:

Right. That makes sense.

Robin D. :

taxes would still be owed just coming from different places

Robin D. :

I like to explain it as different pckets, same pair of pants

Robin D. :

Do you feel better about seeing that the expense is being shown?

Customer:

I do.

Robin D. :

Great

Customer:

Just the way that it calculated it made me feel like I was being ripped off.

Robin D. :

I know

Customer:

I didn't even think about it calculating self-employment tax into it.

Robin D. :

People forget about the SE tax

Robin D. :

And remember

Robin D. :

you are getting half of that on your 1040 as an adjustment (the SE tax)

Customer:

Is there a standard way to calculate how much SE tax you will pay?

Robin D. :

The easiest way is to plug in the numbers on the SE . The rate consists of 12.4% for social security and 2.9% for Medicare taxes for 2013.

Customer:

Got it.

Customer:

Thank you for your help today.

Robin D. :

You are most welcome.
Your positive rating is always thanks enough.

Robin D. :

I really enjoyed working with you – please feel free to request me again when you come back to ask another question.

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7434
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and other Tax Specialists are ready to help you

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