Ask Liz Weston

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Q&A

Q&A: When an employee is misclassified as contractor

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Dear Liz: A parent recently wrote to you about a son who was being paid as a contractor. I know someone else who got a job that did not “take out taxes from his paycheck.” Such workers believe they are pocketing more money, but unfortunately, too many do not know about the nature of withholding. They only learn if they choose to file for their expected refund, but instead discover an exorbitant tax liability that a paycheck-to-paycheck worker cannot pay.

The sad fact is that many of these employers improperly classify their workers, who are truly employees, as independent contractors! And they do this to avoid paying their own portion of Social Security and unemployment taxes and also workers compensation insurance.

If workers believe that they have been misclassified (the IRS website provides all criteria), they can file IRS Form SS-8 and Form 8919, which will allow them to pay only their allocated half of their Social Security taxes. Hopefully the IRS will then contact these employers to correct their wrong classifications. And finally, it should be a law that, when hired, all true independent contractors should be given a clear form (not fine print on their employment agreements) that informs them of their status and the need to make estimated tax payments.

Answer: A big factor in determining whether a worker is an employee or contractor is control. Who controls what the worker does and how the worker does the job? The more control that’s in the employer’s hands, the more likely the worker is an employee.

However, the IRS notes that there are no hard and fast rules and that “factors which are relevant in one situation may not be relevant in another.”

The form you mentioned, IRS Form SS-8, also can be filed by any employer unsure if a worker is properly classified.

Q&A: Be aware of these issues when switching between Medicare Advantage and Medicare

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Dear Liz: I am planning to retire this year. If I choose a Medicare Advantage Plan, am I able to switch back to original Medicare without paying a fine?

Answer: Medicare won’t charge you extra, but you won’t necessarily have “guaranteed issue” rights for a Medigap supplemental policy. If you want to switch after the first 12 months, you could pay a lot more for this important supplemental coverage.

To recap, Medicare Advantage plans are the all-in-one alternative to original Medicare.

Medicare Advantage plans may offer types of coverage that original Medicare does not, such as hearing, dental or eye care. Many people like the fact that their Advantage plans seem to include more than original Medicare, and do so for a low or even no additional monthly premium.

But Medicare Advantage plans are offered by private insurers, which typically have networks of medical providers. These networks, as well as other benefits, can change from year to year. If you get care outside the networks, you typically pay more — sometimes a lot more. The rap on Medicare Advantage plans is that they can be great when you’re healthy, but depending on the plan may not be so great if you get sick.

With original Medicare, benefits remain the same and you can use any provider that accepts Medicare (the vast majority do). But original Medicare coverage has significant gaps, which is why you’ll need a Medigap plan offered by a private insurer.

If you opt for original Medicare when you are first eligible, insurers are required to issue you a Medigap policy and can’t charge you more based on your health status. Without guaranteed issue, an insurer can refuse to write you a Medigap policy or charge you a lot more.

You also have guaranteed issue rights if you buy a Medicare Advantage plan when you first become eligible for Medicare, but decide within 12 months to switch to original Medicare.

Q&A: Don’t confuse Social Security’s spousal and survivor benefits

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Dear Liz: I waited until 70 to start taking Social Security. My wife, who is the lower earner, took a spousal benefit at her full retirement age. I know she is entitled to my benefit when I pass. However, I understand she does not get my current benefit but the amount I would have received if I had started Social Security at my full retirement age. How do I find that amount?

Answer: You don’t need to. Your wife’s current spousal benefit was based on the amount you would have received at full retirement age. Her survivor benefit — the one she would get if you die first — will be 100% of your current benefit. Because you waited and maximized your own benefit, you also maximized the survivor benefit she may have to live on in the years to come.

Many people confuse the rules for spousal and survivor benefits. Even though they’re based on the same thing — the earnings record of the higher or “primary” earner, which is you — they have different rules for how they’re calculated.

Q&A: Unemployed, but the nest egg is large. Is it unethical to get public assistance?

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Dear Liz: I am out of work and taking a pause on my job search. While I have plenty of savings in a diversified portfolio, enough to last many years if needed, my adjusted gross income is small (mostly capital gains from gradual sales of assets). I think I qualify for low-income assistance programs for utility bills and healthcare subsidies but I’m reluctant to apply. These programs are supposed to be for people in need and it doesn’t feel right for me to participate. Are there legal reasons why a high-wealth/low-income household can’t apply for assistance? Is it ethical?

Answer: If you meet the income requirements for a program — and there are no asset limits that would rule out your participation — then there’s no legal reason for you not to participate.

If the program’s resources are finite, though, you might well feel an ethical qualm about taking assistance that someone else needs more.

However, there’s no reason to pass up the tax credits that help reduce the cost of health insurance purchased through Affordable Care Act exchanges. The program was deliberately designed so that most Americans, not just those in the greatest need, could get help paying their health insurance premiums.

Q&A: A first paycheck means getting to know Uncle Sam

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Dear Liz: My recently graduated child got a job and he will be given a 1099 tax form for his earnings. I know he will have to file his taxes differently and will need to pay both state and federal income taxes, but will he also make payments toward Social Security? Will these months (and maybe years) go toward his lifetime “credits” of paying into Social Security?

Answer: The company is paying your son as an independent contractor rather than as an employee. That means he will need to file his taxes as someone who is self-employed. So yes, he’ll be paying into Social Security — and he’ll be doing so at twice the rate of employees who receive W2s.

Normally, Social Security and Medicare taxes are split between employees and employers. Both pay 7.65% of the employee’s wages, for a total of 15.3%. Self-employed workers must pay both halves.

Your son won’t have taxes withheld from his earnings, so he’ll likely need to make quarterly estimated tax payments to avoid penalties. A tax pro can help him set up these payments and suggest legitimate expenses he can use to reduce his tax bill.