Self Employment

		1099-MISC, "Independent Contractor" or *"Self Employed Income"*
*In Actor Speak* Performers receive their pay as either "Employees" (and receive a W-2) or as "Independent Contractors" for which they may, or may not, receive a "1099-MISC." Although receiving your income without taxes having been taken out may seem wonderful at the time you are earning it, there are numerous considerations that you must be made aware of before you go out spending that money without planning for the tax ramifications. Despite the opinion of the IRS that: "The majority of entertainers and technicians are employees and will receive a Form W-2 with Federal income tax and FICA tax withheld," The truth is that for modeling or print work, independent films (non union), Theatre (again non-union), personal appearances and many other forms of performance related work, we are often paid in cash. (NOTE: The term "cash" in this context means getting paid in cash OR by check. We are essentially referring to payment of any kind with no taxes being withheld.) To understand the tax problems you may face with cash payments requires a long explanation but essentially you need to know that (in general) this income requires you to pay both Federal Taxes and "Self Employment" taxes. (Self Employment tax = The equivalent of Social Security taxes normally withheld and then matched by the employer for your gross income. This tax must be paid on the profit from the "cash" income. Profit = Your income minus the costs of acquiring and performing the work.) Your Federal taxes are a percentage of your Taxable Income. The percentage changes as you earn more money. (Taxable Income = Your income as adjusted minus your itemized or standard deductions and your personal exemptions. Personal Exemptions = The amount is established by the IRS as a credit for each person. For year 2003 that amount is $3050. A single person would have one exemption, a couple two, each child one more, etc. If you have Taxable income of $20,000, you would owe 10% on the first $7,000 ($700) and then 15% on the amount up to $20,000 ($1950) for a total of $2,650 owed in Federal taxes. In addition, you owe another 15% (approximately) in Self Employment Tax on the Profit you earned in 1099 income. If the full $20,000 you are showing in Taxable Income happened to equal your profit for your 1099 work, that amount would be an ADDITIONAL $3,000. So, add the two amounts together and for the $20,000 you earned in cash, self-employment, "under the table," or whatever term you would like to call it, you owe $5,650 and the IRS is empowered to collect it. More simply put, a good rule of thumb is that for every $1,000 you make in self employment income, you owe 30% or $300. This is money that should be put aside and/or paid into the IRS quarterly to make sure that you aren't stuck with a huge tax bill the following year that you can't pay. Bear in mind, if this happens you not only have to make payments on that tax the following year, if you continue earning your money in the same manner you also have to pay the NEW taxes quarterly as well. We have neglected to include the State Taxes you will ALSO owe on the taxable income (although there are no additional self employment taxes owed to the state.) The ditch is hard to crawl out of once it is dug. What seemed so wonderful when you first earned the money turns into a nightmare rather soon. Beware. Here are some additional points that assist you to understand this situation: When you are hired as an employee, the employer is required to withhold taxes for your Federal taxes and 7.5% of your gross earnings (up to a limit) for your Social Security obligation. What most people don't know is that the employer is also required to MATCH the 7.5% they are withholding from you with another 7.5%. That's why when you are self employed, you have to pay the full 15% as you are both the employer AND the employee. So you know, there are other costs involved for the employer. For example, when you are hired under a S.A.G. or AFTRA contract, the producer has to pay another 14.3% of your gross salary to the union for Health and Pension. In just these two added costs (14.3% plus the 7.5% Social Security payment) they owe another 21.8%. Simply put, for every $100 you are to receive in salary, they actually have to pay more than $122 out of their pocket. That also explains why the person you might be working for is so anxious to have you working under the table or as an independent contractor. They would much rather save the money and force you to lose the 7.5% in social security than pay their fair share for what they would normally owe for your services. *Back to Topics*		Employee Versus Independent Contractor The majority of entertainers and technicians are employees and will receive a Form W-2 with Federal income tax and FICA tax withheld. The extent of control a studio or production company has over an entertainer continues to be the determining factor in classifying an individual as either an employee or an independent contractor. Treas. Reg. section 31.3401(c)-1(b) states in part: Generally, the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. Audit Techniques When a taxpayer has received a Form W-2, but claims to actually be an independent contractor, be thorough in developing the facts. Consider the following factors: The taxpayer received the W-2 several years prior to the audit. Has the taxpayer taken any action to correct the situation? The taxpayer received all the benefits of an employee (health benefits, pension plan, unemployment). Has the taxpayer taken any action to waive these benefits? If the taxpayer is a member of a guild, does the taxpayer have an individually negotiated contract? If the only contract is the union or guild agreement, the taxpayer is an employee. The union/guild agreement was negotiated as a collectively bargained agreement on behalf of employees. Contributions were made on behalf of the taxpayer to a union/guild pension plan indicate that the taxpayer is an employee. With few exceptions, taxpayers issued Forms W-2 will report these wages on their Form 1040 and not on a Schedule C. No consideration should be given to performers who claim to be a statutory employee or a statutory non-employee which would allow expenses to be taken against income not subject to either the 2 percent AGI limitation or Alternative Minimum Tax. There is no such statute applicable to this industry. One important exception, allowing an employee to claim expenses in arriving at adjusted gross income, is IRC section 62(a)2(B). This section pertains to "performing artists" as defined in IRC section 62(b). A qualified performing artist is one who: Has performed services in the performing arts for two or more employers (receiving at least $200 from each). Has expenses related to performing arts services which exceed 10 percent of the income earned from the performing arts. Has an adjusted gross income of $16,000 or less before deduction of expenses related to performing arts. If a taxpayer received both a Form W-2 and a Form 1099 income, determine what the Form 1099 income is; that is, independent contractor, wages, self-employment income, or reimbursement. Allow related expenses against this income. Allocate expenses between Schedule A and Schedule C when the taxpayer has both the Form 1099 and Form W-2 income in the same line of work. If the taxpayer cannot establish which expenses directly result from which source of income, allocate based on the following formula: Entertainment Schedule A W-2 Entertainment Income Business Misc. ---------------------------------- X Expenses = "EBE" Total Entertainment Income The balance of the entertainment business expenses may be allowed on a Schedule C. Self-Employment Tax Considerations Net profit from self-employment over $400 is subject to self-employment tax. Once expenses have been properly allocated, insure that any net profit or loss is considered in determining the taxpayer's net self-employment income. Remember to include income or losses from partnerships and other self-employed activities. Residual payments that do not have FICA withholding should be assessed self-employment tax if a net profit is realized after related expenses, if any, are deducted. Royalties resulting from services performed (music performed, songs written, a screenplay written, etc.) are subject to self-employment tax in the same manner as residuals. Royalties from merchandising or licensing, which did not involve any services, are not subject to self-employment tax. *Back to Topics*

1099-MISC,
"Independent Contractor" or
"Self Employed Income"

In Actor Speak

Performers receive their pay as either "Employees" (and receive a W-2) or as "Independent Contractors" for which they may, or may not, receive a "1099-MISC."

Although receiving your income without taxes having been taken out may seem wonderful at the time you are earning it, there are numerous considerations that you must be made aware of before you go out spending that money without planning for the tax ramifications.

Despite the opinion of the IRS that:

"The majority of entertainers and technicians are employees and will receive a Form W-2 with Federal income tax and FICA tax withheld,"

The truth is that for modeling or print work, independent films (non union), Theatre (again non-union), personal appearances and many other forms of performance related work, we are often paid in cash.

(NOTE: The term "cash" in this context means getting paid in cash OR by check. We are essentially referring to payment of any kind with no taxes being withheld.)

To understand the tax problems you may face with cash payments requires a long explanation but essentially you need to know that (in general) this income requires you to pay both Federal Taxes and "Self Employment" taxes.

(Self Employment tax = The equivalent of Social Security taxes normally withheld and then matched by the employer for your gross income. This tax must be paid on the profit from the "cash" income.

Profit = Your income minus the costs of acquiring and performing the work.)

Your Federal taxes are a percentage of your Taxable Income. The percentage changes as you earn more money.

(Taxable Income = Your income as adjusted minus your itemized or standard deductions and your personal exemptions.

Personal Exemptions = The amount is established by the IRS as a credit for each person. For year 2003 that amount is $3050. A single person would have one exemption, a couple two, each child one more, etc.

If you have Taxable income of $20,000, you would owe 10% on the first $7,000 ($700) and then 15% on the amount up to $20,000 ($1950) for a total of $2,650 owed in Federal taxes.

In addition, you owe another 15% (approximately) in Self Employment Tax on the Profit you earned in 1099 income. If the full $20,000 you are showing in Taxable Income happened to equal your profit for your 1099 work, that amount would be an ADDITIONAL $3,000.

So, add the two amounts together and for the $20,000 you earned in cash, self-employment, "under the table," or whatever term you would like to call it, you owe $5,650 and the IRS is empowered to collect it.

More simply put, a good rule of thumb is that for every $1,000 you make in self employment income, you owe 30% or $300. This is money that should be put aside and/or paid into the IRS quarterly to make sure that you aren't stuck with a huge tax bill the following year that you can't pay.

Bear in mind, if this happens you not only have to make payments on that tax the following year, if you continue earning your money in the same manner you also have to pay the NEW taxes quarterly as well.

We have neglected to include the State Taxes you will ALSO owe on the taxable income (although there are no additional self employment taxes owed to the state.)

The ditch is hard to crawl out of once it is dug. What seemed so wonderful when you first earned the money turns into a nightmare rather soon. Beware.

Here are some additional points that assist you to understand this situation:

When you are hired as an employee, the employer is required to withhold taxes for your Federal taxes and 7.5% of your gross earnings (up to a limit) for your Social Security obligation.

What most people don't know is that the employer is also required to MATCH the 7.5% they are withholding from you with another 7.5%. That's why when you are self employed, you have to pay the full 15% as you are both the employer AND the employee.

So you know, there are other costs involved for the employer. For example, when you are hired under a S.A.G. or AFTRA contract, the producer has to pay another 14.3% of your gross salary to the union for Health and Pension. In just these two added costs (14.3% plus the 7.5% Social Security payment) they owe another 21.8%.

Simply put, for every $100 you are to receive in salary, they actually have to pay more than $122 out of their pocket.

That also explains why the person you might be working for is so anxious to have you working under the table or as an independent contractor. They would much rather save the money and force you to lose the 7.5% in social security than pay their fair share for what they would normally owe for your services.

Back to Topics

Employee Versus Independent Contractor

The majority of entertainers and technicians are employees and will receive a Form W-2 with Federal income tax and FICA tax withheld. The extent of control a studio or production company has over an entertainer continues to be the determining factor in classifying an individual as either an employee or an independent contractor. Treas. Reg. section 31.3401(c)-1(b) states in part:

Generally, the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.

Audit Techniques

When a taxpayer has received a Form W-2, but claims to actually be an independent contractor, be thorough in developing the facts. Consider the following factors:

The taxpayer received the W-2 several years prior to the audit. Has the taxpayer taken any action to correct the situation?
The taxpayer received all the benefits of an employee (health benefits, pension plan, unemployment). Has the taxpayer taken any action to waive these benefits?
If the taxpayer is a member of a guild, does the taxpayer have an individually negotiated contract?

If the only contract is the union or guild agreement, the taxpayer is an employee. The union/guild agreement was negotiated as a collectively bargained agreement on behalf of employees.

Contributions were made on behalf of the taxpayer to a union/guild pension plan indicate that the taxpayer is an employee.

With few exceptions, taxpayers issued Forms W-2 will report these wages on their Form 1040 and not on a Schedule C. No consideration should be given to performers who claim to be a statutory employee or a statutory non-employee which would allow expenses to be taken against income not subject to either the 2 percent AGI limitation or Alternative Minimum Tax. There is no such statute applicable to this industry.

One important exception, allowing an employee to claim expenses in arriving at adjusted gross income, is IRC section 62(a)2(B). This section pertains to "performing artists" as defined in IRC section 62(b). A qualified performing artist is one who:

Has performed services in the performing arts for two or more employers (receiving at least $200 from each).
Has expenses related to performing arts services which exceed 10 percent of the income earned from the performing arts.
Has an adjusted gross income of $16,000 or less before deduction of expenses related to performing arts.

If a taxpayer received both a Form W-2 and a Form 1099 income, determine what the Form 1099 income is; that is, independent contractor, wages, self-employment income, or reimbursement. Allow related expenses against this income. Allocate expenses between Schedule A and Schedule C when the taxpayer has both the Form 1099 and Form W-2 income in the same line of work. If the taxpayer cannot establish which expenses directly result from which source of income, allocate based on the following formula:

Entertainment Schedule A

W-2 Entertainment Income                      Business            Misc.
----------------------------------   X      Expenses    =    "EBE"
Total Entertainment Income

The balance of the entertainment business expenses may be allowed on a Schedule C.

Self-Employment Tax Considerations

Net profit from self-employment over $400 is subject to self-employment tax. Once expenses have been properly allocated, insure that any net profit or loss is considered in determining the taxpayer's net self-employment income. Remember to include income or losses from partnerships and other self-employed activities.

Residual payments that do not have FICA withholding should be assessed self-employment tax if a net profit is realized after related expenses, if any, are deducted.

Royalties resulting from services performed (music performed, songs written, a screenplay written, etc.) are subject to self-employment tax in the same manner as residuals. Royalties from merchandising or licensing, which did not involve any services, are not subject to self-employment tax.

Back to Topics