Free-lancers often face self-employment tax


I work for a local church that has been paying its musicians as employees, but they are NOT employees, so we are changing them to contract labor.  The musicians are wondering how this affects them at tax time. I explained that instead of a W-2 they would get a 1099, and that taxes would no longer be withheld.  They are concerned that they would then have to pay the employer and employee portion of Social Security.  Since most of them have other jobs, I didn't think the Social Security tax would be an issue.  Is this correct?  Also, for those individuals that do not have a job, (but for some of them - their spouse does) - how do they handle the Social Security taxes.  D.G - via e-mail.


You’ve determined that your musicians are not employees and so you no longer have to withhold tax on their pay. You've wisely explained this to them, so they won't be completely surprised when it's time to fill out their tax return.  


Here's what else they need to know:  


Instead of reporting their income directly on page one of the tax return, as they do with W-2 income, your musicians will now need to fill out a Schedule C, Profit or Loss From Business. Many of them may already use this form if they perform on a free-lance basis for others.  


There's also a form C-EZ, Net Profit From Business, which is available to self-employed people who had business expenses of $2,500 or less and do not deduct expenses for business use of the home.  


If the musicians are employed elsewhere, they may not have to pay Social Security tax on the musician income, but in order to avoid the bite of Social Security tax, their income from their jobs must exceed $80,400. If the job income is lower than $80,400, then the musician will have to pay self-employment tax on the musician income.  


Self employment tax is like Social Security tax and Medicare, only twice as high. The self-employed person pays both the employee and the employer share of these taxes. So a self-employed musician whose regular job income is lower than $80,400 (this is the 2001 amount - the amount goes up each year) will pay 15.3 percent self-employment tax on the income earned from the church. This is in addition to federal and state income tax.  


The income earned by the musician's spouse does not get included in the calculation to see if income exceeds $80,400. The spouse could earn more than that amount and the musician would still have to pay the self-employment tax.  


If it appears that the musician is going to owe more than $1,000 in federal taxes (including Social Security tax) in the spring, then the IRS expects to see quarterly estimated tax payments from this person.  


One good part of reporting self-employment income on a tax return is that the musician may take a deduction for expenses relating to the income earned as a self-employed person. If your musicians drive to the church or wherever they perform, the mileage counts as a business deduction.  


Costs relating to the instruments, such as reeds, instrument cleaning supplies, repairs, strings, lessons, and so on may be deducted to the extent that they are used to earn taxable income.  


These expenses, which also get included on the business tax form, will reduce the amount of income reported on the Schedule C, or Schedule C-EZ, and thus reduce the tax (both income tax and self-employment tax) that the musician must pay.  


One thing you should keep in mind is that if your free-lance musicians earn less than $600 per year, you are not required to prepare and file Form 1099 reporting the income you pay them. For example, if you pay a musician $550 for the year, no form gets filed with the IRS.  


The IRS looks for continuity from one year to the next, and if these musicians have reported income as free-lance musicians in the past, the IRS will expect to see a continuation of this process in future tax returns. Even if a 1099 form is not issued, the musician is expected to report and pay taxes on all the amounts earned.  



copyright ©  2001   Gail Perry - Fun with Taxes