Our first official Tinc Tuesday Event held January 12th at 36th Street Studios was a great success. We set out to answer the daunting question “Are you really a freelancer?” while trying not making our heads hurt. Sometimes, understanding the IRS can seem like trying to understand the physics of a black hole. So we sought out the perfect professional to explain it to us: Bryan Stern, CPA. He has worked for some of the biggest names in finance, and owns a practice that caters to artists and entertainment professionals
So here is a re-cap of what we found out.
Plain and simple, this is a VERY complex question. Even the IRS doesn’t have an answer! There is very little information to fabricate a hard and fast rule. How do you attempt to make sense of where you fit in?
First, we defined our terms.
Employee: People who are subject to the employer’s control regarding what will be done and how it will be done. This type of person should get a W2.
Independent Contractor: People who perform services for another party where the employer controls only the result of the work, not the means in which it is accomplished. This type of person should get a 1099.
Essentially, in our industry we are all employees.
So, wait. I get paid on a 1099 but my boss tells me what and how to do my job. Does this mean, legally, I could get in trouble with the IRS? Well, no. And telling the IRS is a good way never to be rehired. Companies often misclassify their workers as Independent Contractors in order to save on costs, something the IRS is none to happy about. However, if anyone will get in trouble for misclassification it will be the employer and not the employee since you have no control over how you get paid.
However, you do have control over what to do with that income, and it is helpful to understand the advantages and disadvantages of being an employee versus an Independent Contractor.
A few we discussed:
Employee on a W2:
Your employer pays 1/2 of you employment taxes.
You are covered under worker’s compensation.
You are eligible for unemployment benefits.
Independent Contractor on a 1099:
You can deduct many more business expenses
You have NO taxes withheld which means more money in the short run.
Much more control over how much tax you pay
You can only deduct a limited number of business expenses.
You pay full amount of employment taxes
You may be subject to quarterly estimated taxes
You are NOT eligible for unemployment.
In the end, “act in good faith,” and chances are you will be just fine. File your tax returns on time, pay anything you owe and don’t deduct more that you should.
And if all of this sounds like Greek or Klingon seek out some help of the CPA variety.
Again, Thank you all who came out to get the full version. There was a lot more covered then I could possibly recap. Stay tuned for future Tinc Tuesday events. And as always, let us know if you have suggestions on future seminars.