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Extra tax liability for self-employed workers

Also: A worker on a 90-day bonus program quit after 22 days but says his employer must pay the bonus.

April 04, 2011|By Karen E. Klein

Dear Karen: I'm self-employed and make $20,000 a year. The tax lady calculated that I owe $1,600. Can this be right?

Answer: Self-employment income is subject to both income tax and self-employment tax. Ordinary income can be reduced by standard deductions and exemptions, but income subject to self-employment tax cannot, said Donald Lucove, a CPA with Lucove, Say & Co. in Calabasas.

"The self-employment tax is calculated using 92.35% of self-employment income at 15.3%," he said. If you're being instructed to pay $1,600, it's likely that figure represents your liability on a net income, after expenses, of approximately $11,300.

"It appears the tax lady reduced your $20,000 gross to a net of almost half, a good deal," Lucove said.

You can find an online tax calculator at http://interactive.taxfoundation.org/taxcalc/.

• Worker quit but demands bonus

Dear Karen: We had an employee on a 90-day bonus program. He quit after 22 days but contends that he is still due the bonus. Is he?

Answer: If your written agreement clearly states employees must work 90 days and still be employed by you to receive a bonus, probably not. If you had an informal agreement that didn't spell out employment requirements, a judge might hand him a pro-rata share of the bonus.

What's key is whether the court would consider the bonus a form of wages, said Eli Kantor, a Beverly Hills employment attorney. "Generally speaking, California courts abhor forfeitures, especially of wages," he said. Make sure the rules of your bonus plan are well-documented so this dispute does not recur.

Small-business questions? Email Karen at smallbiz@latimes.com.

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