An employer might classify a teenager as an independent contractor rather than as an employee to lessen the paperwork and employer taxes. But for the teenage worker, the tax filing as an independent contractor is more complicated than as an employee.
Independent contractors do not have Social Security or Medicare taxes withheld from their paycheck, but are responsible for paying these taxes themselves. The IRS calls these taxes self-employment tax. On the other hand, employees have half their Social Security or Medicare taxes withheld from their paychecks, while their employer pays the other half.
Teenagers may be hired as independent contractors and owe significant self-employment taxes at the end of the year. “I had a mother call me asking why her teenage daughter was given a Form 1099MISC instead of a W-2,” recalls Carol Topp, a CPA from Cincinnati, Ohio. “I explained that her teenage daughter was classified as a self-employed independent contractor, would have a complicated tax return, and be liable for self-employment tax of 15% of her net earning. Needless to say the mother was quite angry at the employer for not explaining these tax consequences when hiring her daughter.”
The IRS is currently focusing on worker misclassification and warns taxpayers to fully understand the difference between employee and independent contractor status. “I believe that parents and teenagers need to ask the employer some questions about worker classification when being hired,” warns Topp who operates a website, http://TeensAndTaxes.com.
Independent contractors are hired for a specific task or project, bring their own tools, may work for several clients, and do not need training. Examples of typical independent contractor jobs for teenagers are newspaper carriers, website designers, computer repair technicians, entertainers, musicians and tutors.
The IRS has created a program, called the Form SS-8 Worker Status Determination program, to allow a business or worker to request the IRS make a determination of a worker’s status as an employee or an independent contractor. Either the worker or the employer can submit a Form SS-8 to request the determination.
Form 8919 can be used for misclassified workers to pay the correct amount of Social Security and Medicare tax. “The Form 8919 has specific criteria of who can file it,” explains Topp. Taxpayers, and especially teenagers who have been misclassified, are advised to get professional tax assistance when dealing with correcting a misclassified worker. The IRS has information on their website www.irs.gov on worker misclassification.
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Certified Public Account, Carol Topp, CPA operates an accounting practice specializing in tax preparation, micro business start ups, and non-profit accounting.