My husband and close friends all know I will do nearly anything to avoid getting my act together when it comes to getting ready for tax time. I don’t mind doing what it takes to make the money, but getting all of the tax information together drives me nuts.
For decades, my income has come from a variety of sources that included both clinical employee wages and a complex array of independent contractor payments from writing, consulting, and speaking. Dealing with nonemployee income is tedious and time consuming. In addition to keeping track of the payments, the federal government expects the worker to file quarterly estimated tax payments.
My husband, Derek, has a degree in finance. His job involves accounting duties all day long, and he is an employee so his office issues a single W2 every year. The last thing in the world he wants to do when he comes home is help me assemble receipts and tally expenses.
Every year I promise Derek I will try to get the annual chore done without filing an extension. And every year, I break my promise. Our tax advisor, Denise, has prepared our return for decades. Thankfully, she has a full appreciation of our income sources and a keen understanding of my struggle with taxaphobia.1
Organize your paystubs/document income
Even if you only work in one office as a clinical dental hygienist, it is smart to make copies of all pay stubs. At the end of the year, make sure all wages and tax payments add up to what is reported on your W2 statement. Mistakes happen, and it is far easier to get a form corrected before you file your return.
The Social Security Administration keeps track of FICA and Medicare payments made by you and your employers. It makes sense to keep track of the figures, so accurate records are important. When it comes time to apply for Social Security, benefit payments are based on a worker’s earning history and age.2,3 To help workers plan for their future, the Social Security Administration sends workers an annual report that contains estimates on amounts that will be paid at different retirement times.
Know who is doing your taxes
There are a number of options regarding who can prepare your taxes. You can do your own, use a software-based tax package, hire an online tax preparation service, or meet in person with a tax specialist who works with a firm that prepares tax returns. If you choose to use a firm or preparer at this level, it is smart to pick someone who voluntarily participates in the IRS Annual Filing Season Program.4
When your tax situation becomes more complex than getting a few W2 forms a year, it may be worthwhile to have your return prepared by someone who can actually represent you if there is ever a dispute. Tax professionals at this level hold serious credentials and must fulfill significant continuing education requirements that keep them abreast of changes in tax law. There are three professional preparers who fall into this category: certified public accountant, lawyer that deals with taxes, and an IRS registered agent. Each is qualified to prepare tax returns; but their focus may vary.4 It is best to understand if their services are a good fit for your needs.
Be familiar with your state licensure laws
Tax preparation specialists and tax prep computer software programs are not mind readers. They are familiar with general tax laws and changes in the tax laws over time.
While the topic of dental hygienists being misclassified as 1099 independent contractors is hot in our world, it is unrealistic to expect that the person preparing your taxes knows this profession-specific detail that is tied to the basic dental hygiene license. In nearly all clinical situations, dental hygiene practice requires supervision by a licensed dentist. Supervised workers can’t be independent contractors.5 They should be paid as employees.
It is important to have an open and frank conversation with the preparer about all income to determine the proper taxes based on worker classification and how the income is reported.
Deciding on an SS8/adding form 8919
When a dental hygienist receives employee wages, the employer pays half of the Social Security and Medicare taxes, and the worker pays the other half. The entire tax burden shifts to the worker who accepts independent contractor wages.5-7 This translates to a 7.65% loss of actual income.6
Even though the IRS has repeatedly ruled that we are employees, there are hygienists who are paid as contractors. In order to avoid paying the employer portion of these two taxes, a misclassified worker has the right to submit IRS Form SS8 to determine classification status.5,6 When choosing this route, it is best to submit the SS8 form prior to filing your current tax return to avoid getting your return bogged down due to a misclassification issue. It takes time to process an SS8. Adding Form 8919 to the year’s tax return allows the worker to pay taxes at an employee level while waiting for a determination.5
Report all income
Some think that the only income that needs to be reported is what is listed on a W2 or a 1099-NEC form, but this is not the case. All wages must be reported.8 Even if one earns less than $600 as an independent contractor, the wages still have to be reported. The same goes for all under-the-table cash payments. There is simply no free money. Businesses are not required to issue Form 1099 to the worker if the amount is less than $600 in any one year,9 but businesses will deduct the wages as a business expense on their returns, so there is an actual record of wages being paid to each worker.
Side gig income
Earning money outside of clinical can be fun and rewarding and it still needs to be declared. 8 An added benefit to having your own business venture, or working as an independent contractor, is the opportunity to deduct certain business expenses that relate to this specific income.10
Changes in the 2018 federal tax bill dramatically changed what expenses can be claimed, but it is worth a chat with your tax expert. Even after passing legislation, the IRS and state taxing authorities can make additional modifications or clarifications over time, factors that keep tax specialists on their toes.
A relationship with your tax specialist
It can make sense to stick with the same preparer from one year to the next providing it is a good fit. If your tax situation is complex at all, your preparer will become familiar with how you earn income. This is particularly important to those who have both clinical and nonclinical income streams. It is also helpful when there is a major life change such as marriage or divorce, becoming a parent or guardian, or when retiring.
Final thoughts
Typically, my articles offer suggestions based on what I have found works, but this one is full of advice that should help you avoid my annual tax stress headaches. I can just hear Derek and Denise muttering, “Is she turning over a new leaf?”
Disclaimer: The information provided in this article does not, and is not intended to, constitute legal or tax advice; instead, all information is for general information purposes only. This article contains links to both governmental and third-party websites. Such links are only for the convenience of the reader. Readers should contact their attorney, CPA, or qualified tax preparation specialist to obtain advice regarding any personal legal or tax matters. The following conversation is intended to alert dental health-care workers regarding reporting income on tax returns.
Dig in: find more articles by Anne Guignon here.
References
- Taxaphobic in Chicago. https://ask.metafilter.com/269195/Taxaphobic-in-Chicago. Ask Meta Filter. September 28, 2014. Accessed December 26, 2020.
- Brandon E. How much you will get from social security. US News and World Report. https://money.usnews.com/money/retirement/social-security/articles/how-much-you-will-get-from-social-security. January 21, 2020. Accessed December 26, 2020.
- Social security quick calculator. https://www.ssa.gov/OACT/quickcalc/. Social Security Online. Accessed December 26, 2020.
- Understanding tax return preparer credentials and qualifications. Internal Revenue Service. https://www.irs.gov/tax-professionals/understanding-tax-return-preparer-credentials-and-qualifications. Page last reviewed or updated November 3, 2020. Accessed December 27, 2020.
- Independent contractor (self-employed) or employee? Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. Page last reviewed or updated November 9, 2020. Accessed December 27, 2020.
- Topic No. 751 Social Security and Medicare withholding rates. Internal Revenue Service. https://www.irs.gov/taxtopics/tc751. Page last reviewed or updated October 22, 2020. Accessed December 27, 2020.
- Self- employment tax (Social Security and Medicare tax). Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/self-
- employment-tax-social-security-and-medicare-taxes. Page last reviewed or updated November 25, 2020. Accessed December 26, 2020.
- What is taxable and non-taxable income? https://www.irs.gov/businesses/small-businesses-self-employed/what-is-taxable-and-nontaxable-income. Page last reviewed or updated September 19, 2020. Accessed December 26, 2020.
- Reporting payments to independent contractors. Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/reporting-payments-to-independent-contractors. Page last reviewed or updated November 25, 2020. Accessed December 26, 2020.
- Fontinelle A. 15 tax benefits for the self-employed. Investopedia. https://www.investopedia.com/articles/tax/09/self-employed-tax-deductions.asp. Updated November 19, 2020. Accessed December 26, 2020.
ANNE NUGENT GUIGNON, MPH, RDH, CSP, a visionary thinker, has received numerous accolades over four decades for mentoring, research, and guiding her profession. As an international speaker and prolific author, Anne focuses is on the oral microbiome, erosion, hypersensitivity, salivary dysfunction, ergonomics, and employee law issues. She may be contacted at [email protected].
