I hope someone can answer this

[husker71]

I may be putting it in the wrong forum     My neighbor came over tonight and he has a son maybe 22 or 23 getting ready for grad school in January .  He took a job doing some construction work and the employer gave him a 1099 form.  Anyway the son got his paycheck and even though he worked 80+ hours he was not paid any overtime just 80 hours straight.  If this is the way it is supposed to be done then it is ok.  I don't really have a dog in this fight but told him I would ask.  Thanks guys

[Ragnar Hogbrok]

http://www.dol.gov/whd/overtime_pay.htm

Here's what the department of labor had to say. It seems that he should have been paid overtime unless the employer is exempt.

[JoeyCapital]

If he really got a 1099 instead of a w2 then it means he's not an employee. He is considered an independent contractor and he doesn't have the same rights a w2 employee has. Overtime, workmans comp etc are some of the rights 1099 people don't have.

Having a 1099 worker is a pretty sweet deal for the employer, because they don't have to treat them the same financially. Sounds like the employer got a sweet deal on your buddies kid.

[Ragnar Hogbrok]

If he really got a 1099 instead of a w2 then it means he's not an employee. He is considered an independent contractor and he doesn't have the same rights a w2 employee has. Overtime, workmans comp etc are some of the rights 1099 people don't have.

Having a 1099 worker is a pretty sweet deal for the employer, because they don't have to treat them the same financially. Sounds like the employer got a sweet deal on your buddies kid.

Good answer.  I didn't even pick up the 1099 portion of his post.  I've been skimming instead of reading a lot lately.

[JoeyCapital]

Good answer.  I didn't even pick up the 1099 portion of his post.  I've been skimming instead of reading a lot lately.

My coffee hit me at about the same time I read his post, so I have to give some of the credit to chemicals.

[husker71]

thanks guys   I told him to just go get a regular job at $9 or so and forget working out in the sun for this guy.

[Ragnar Hogbrok]

thanks guys   I told him to just go get a regular job at $9 or so and forget working out in the sun for this guy.

If he gets paid decent wages and he can get 80 hours a week, it might not be a bad thing even without overtime pay.

[hog.goblin]

The big problem is he will owe 15.3% self-employment tax on this income, in addition to whatever income tax he owes.  Businesses who do this are scum and are worse than illegals when it comes to tax revenue.

[Old Tusk]

Don't forget he is responsible  for withholding taxes

[hog.goblin]

and he can't file for unemployment if he is "fired"

[JoeyCapital]

and he can't file for unemployment when he is "fired"

Fify

[PonderinHog]

Did he provide his own tools?  Did he set his own hours? Did the contractor supervise his work in any way?  He can always fill out IRS Form SS-8, if feels he was improperly classified as a subcontractor. 

[john c]

Ponderin is right.  A rose by any other name ...  I'll bet contractor provided tools, supervision, timing, etc.  Further, I expect contractor didn't ask youngster to provide his own Work Comp certificate.  Wonder what contractor would say/do if boy got hurt on job.  Could be a very expensive $9/hr.  Wonder if contractor will ask for a lien release from youngster.  All proof that contractor is probably not in good standing legally.  DOL doesn't like contractors that do this.  DOL could also contact other agencies if they were called about this.  Bad business.   

[waphill]

Did he provide his own tools?  Did he set his own hours? Did the contractor supervise his work in any way?  He can always fill out IRS Form SS-8, if feels he was improperly classified as a subcontractor. 

This. There are certain requirement that must be met in order for him to be an independent contractor. Something tells me he's getting screwed.

[majestic]

File a wage claim: http://www.labor.ar.gov/divisions/Pages/wageClaims.aspx

[BigBrandonAllenFan]

The employer also does not have to pay social security taxes on the employee when he pays by 1099.  The 1099 is most often used by crew providers (subcontractors) in the home construction business, as in the carpenters, painters, brick layers, roofers, ect...  Problem is, the contractors seek out the cheapest crews, and those "cheaper" crews are the 1099'ers.  Very few sub crews pay on a W-2.  It is rare.  Where it starts is with the primary contractors, as they avoid paying additional taxes by paying sub-contractors in the form of 1099 also, and the sub passes the 1099 on to his employees.  If not for the 1099, the cost of a new home would go up about 35% to the buyer.

It is a double edged sword of sorts.  If you want to pay 35% more for your new home, then change the law not to include secondary (laborers) workers as eligible for 1099 compensation.

The really big problem with 1099, is that it gets the laborer in trouble with the IRS.  It is estimated that up to 75% of ongoing unpaid labor taxes are people who were paid on a 1099.

[hog.goblin]

Where it starts is with the primary contractors, as they avoid paying additional taxes by paying sub-contractors in the form of 1099 also, and the sub passes the 1099 on to his employees.  If not for the 1099, the cost of a new home would go up about 35% to the buyer.

It is a double edged sword of sorts.  If you want to pay 35% more for your new home, then change the law not to include secondary (laborers) workers as eligible for 1099 compensation.

This defies mathematical logic in two ways:

1) We are talking about a 7.65% FICA cost on some labor.  How does this result in a 35% increase in the total price of a house?
2) Even then, the total cost of the house is the same.  Whether a GC pays 7.65%, saving the sub 7.65%, or the GC pays zero, and the sub pays 15.3%, the cost of the house is the same, because the total tax is the same.

Now, not all subs can pass along the cost to GCs, and certainly not all subs can save and pay their taxes when on a 1099, resulting in a real savings to the home owner somewhere between 0 - 7.65%.

The really big problem with 1099, is that it gets the laborer in trouble with the IRS.  It is estimated that up to 75% of ongoing unpaid labor taxes are people who were paid on a 1099.

I'm not sure where you got the percentage of 75%, but it has to be close.  Subs are getting screwed by GCs because they can't negotiate.  If the GC is going to pay the sub $14 an hour on a W-2, but then the first check comes without taxes and the declaration that it will be a 1099, the GC should really be paying $15.16 which is equivalent pay.  But it just doesn't happen because they'll go find another sub.

Laws don't need to be changed or written, they just need to be enforced.

[BigBrandonAllenFan]

I get it from once being part of that subcontractor's labor force.  That 75% number is probably low actually, because pretty much every dam* one of us "1099'ers" owed the IRS back taxes that we couldn't afford to pay, because the subs grinded the laborers for the minimum pay they could possibly dish, which led right back to the general contractor doing the same, which led to the poor house.  Hell, half the subcontractors I knew owed the IRS back taxes... The laborers didn't stand a chance, all the whiole the general contractors were driving a Chevy 3500 4x4 wearing ostrich skin boots and Ray Bans..

Like I said, if you want to pay 35% more for your home, then re-regulate the laws into compensatory fairness for the ones actually doing the work..  Hog Goblin made a lame attempt to skim the surface of the problem in financial reality.

[john c]

According to the OP, I agree with Goblin and Majestic.  If the young man took a job from an "Employer" as described and received a 1099, he simply files on that and pays the SE tax.  I can't imagine the IRS going after the young man because his "Employer" gave him a 1099 rather than a W-2.  The DOJ call often rectifies this.  The paperwork trail will likely sink the "Employer".  No lame attempt, just the facts.

[BigBrandonAllenFan]

Do you know the percentage of the home building labor force that has insurance through his Subcontrator for whom he works?  Unless you're a licensed plumber, HVAC licensed, or a licensed electrician, that insured number is pretty much zero.  That uninsured labor group includes the concrete crew, the carpenters, the roofers, the dry wallers, the painters, the brick layers, the ground scapers, and all the rest...Whom do it every day for a living...Totaling roughly 85% of the laborers involved in erecting a new home.

If the laws were written in states like Arkansas the same as they are in a few select states with higher standards for the home building labor force, the poor ass hard working $14 an hour laborers would be properly compensated.  Where would that compensation ultimately come from?  It don't take no damn genius to calculate that one.

You ever try to buy health insurance for your family on $14 an hour?  LOL.  Then pay your own taxes?  ROTF. 

A 0 to 7% increase in new home cost is a laugher.  Like I said, if the 1099 "sub subcontractor" nut clipping system was brought to standards to resemble a system that offered a "real job" for the carpenter, painter, roofer, ect..., your new home would cost 35% more instantly..

The 1099 "sub labor" contract loophole should be rewritten.  The way it stands now, you have 1) the general contractor (builder), 2) the subcontractor, and 3) the "sub" subcontractor, better known as the hardworking sweaty guy that bends over and takes it up the ass from the 1) and 2).

Fact is, if the actual Subcontractor (the guy that takes the check from the genral contractor and pays his crew) was held to higher compensation standards for his labor force, the General contractor would have no choice but to pay the increase that the Subcontractor was forced to entail to compensate his employees by law.  Otherwise, without a labor force, he isn't a General contractor.  If you think these needed revisions of law would cost possibly as little as 0%, then I have some of that fine ocean front property in Arizona I want you to look at for a bargain price.   

[hog.goblin]

Like I said, if you want to pay 35% more for your home, then re-regulate the laws into compensatory fairness for the ones actually doing the work..  Hog Goblin made a lame attempt to skim the surface of the problem in financial reality.

Lame?  No, lame is not understanding basic math.  A range of 0 - 7.65% never equals 35%.  The entire point of the OP was "what is the tax consequence of being on a 1099 instead of a W-2."

Of course you kind of changed the rules to make your point.  Forcing undefined higher standards, required insurance, and yet to be described increase regulation, etc.  Well sure, you can make the cost far more than 35% if you want to keep increasing the cost of doing business.  It just depends on how much you want to add in standards.

Let's look at the real world.  A GC rarely hires a plumber.  He hires a plumbing company, not an individual, one that does a lot of residential construction (sticking with your home theme).  If the GC likes that plumber he hires him to do a lot of his homes.

But he doesn't withhold tax because he's paying a business for services.  That's not an employer-employee relationship.  It's up to the plumber to hire employees or contract other subs (1099 workers).  Of course here in Arkansas that plumber needs a contractor's license, worker's comp insurance, and will go through an insurance audit that will require him to disclose his 1099 payees.  If he's very large he'll also answer to a bonding company, and here in Arkansas bonding companies are pretty competent and look at financial statements carefully.  Oops, it seems we have some pesky regulations after all. 

The IRS and DOL are also very interested in making sure employees are treated as employees.  But again, the 7.65% tax gets paid either way whether the plumbing company pays it on an employee or whether the 1099 laborer they contract pays it on his own.  The cost of the home only goes down if the 1099 laborer doesn't pay it.  That certainly happens, particularly in the construction industry.

And many times those laborers deduct their commuting mileage, personal tools, and pocket cash payments without reporting it.  As far as taxes go, the construction business is one of the corrupt industries I deal with.  This puts downward pressure on the cost of labor.  A little free market working against the tax burden.  I'm talking less about plumbers and more about the crews you mentioned (carpenters, roofers, painters, etc.).

But the math holds true.  If I'm paying a roofing labor $14 an hour for 1099 work and he demands to be on a W-2, then I say ok and pay him $13.01 per hour and cover his 7.65% payroll tax.  Guess what, I'm still paying $14 an hour.  I could include some extra cost for unemployment, insurance, etc, and pay him $12.75 or whatever I need to make it work.

[BigBrandonAllenFan]

Lame?  No, lame is not understanding basic math.  A range of 0 - 7.65% never equals 35%.  The entire point of the OP was "what is the tax consequence of being on a 1099 instead of a W-2."

Of course you kind of changed the rules to make your point.  Forcing undefined higher standards, required insurance, and yet to be described increase regulation, etc.  Well sure, you can make the cost far more than 35% if you want to keep increasing the cost of doing business.  It just depends on how much you want to add in standards.

Let's look at the real world.  A GC rarely hires a plumber.  He hires a plumbing company, not an individual, one that does a lot of residential construction (sticking with your home theme).  If the GC likes that plumber he hires him to do a lot of his homes.

But he doesn't withhold tax because he's paying a business for services.  That's not an employer-employee relationship.  It's up to the plumber to hire employees or contract other subs (1099 workers).  Of course here in Arkansas that plumber needs a contractor's license, worker's comp insurance, and will go through an insurance audit that will require him to disclose his 1099 payees.  If he's very large he'll also answer to a bonding company, and here in Arkansas bonding companies are pretty competent and look at financial statements carefully.  Oops, it seems we have some pesky regulations after all. 

The IRS and DOL are also very interested in making sure employees are treated as employees.  But again, the 7.65% tax gets paid either way whether the plumbing company pays it on an employee or whether the 1099 laborer they contract pays it on his own.  The cost of the home only goes down if the 1099 laborer doesn't pay it.  That certainly happens, particularly in the construction industry.

And many times those laborers deduct their commuting mileage, personal tools, and pocket cash payments without reporting it.  As far as taxes go, the construction business is one of the corrupt industries I deal with.  This puts downward pressure on the cost of labor.  A little free market working against the tax burden.  I'm talking less about plumbers and more about the crews you mentioned (carpenters, roofers, painters, etc.).

But the math holds true.  If I'm paying a roofing labor $14 an hour for 1099 work and he demands to be on a W-2, then I say ok and pay him $13.01 per hour and cover his 7.65% payroll tax.  Guess what, I'm still paying $14 an hour.  I could include some extra cost for unemployment, insurance, etc, and pay him $12.75 or whatever I need to make it work.

This I totally can agree with, HG.

  But the glaring difference is, which goes back to my original reply, the 1099 laborer ends up with unpaid social security taxes at year's end, and he may owe fed and state taxes too.  But, if the laborer was on a W-2, he wouldn't have that burden at year's end, as his taxes would be withheld weekly.  And it becomes just that in 90% of cases, a burden, and most can't afford the tax at the end of the year, because they all live paycheck to paycheck.  Also, if they were paid W-2, they would likely be getting a tax refund at year's end, rather than an unpayable tax bill.

[BigBrandonAllenFan]

Of course you kind of changed the rules to make your point.   Forcing undefined higher standards, required insurance, and yet to be described increase regulation, etc.  Well sure, you can make the cost far more than 35% if you want to keep increasing the cost of doing business.  It just depends on how much you want to add in standards.

You noticed that did you?   

Just covering the corners, because the problem is a compounded problem.