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Also this week: commission check confusion, and a questionable contractor classification.
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Good morning! Every Saturday, we open the mailbag, pour some strong coffee, and tackle the tax questions keeping America awake at 2 a.m.
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Here are this week’s topics:
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🏺 About that old tax return from three years ago…
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👊 Your commission check just showed up. Some of the money didn’t.
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⚠️ Turns out, “employee” and “contractor” aren’t interchangeable.
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Money Moves
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🏺 That tax mistake might not be ancient history
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I want to amend a return from three years ago. Is it too late at this point?
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Three years ago feels like ancient history when it comes to your taxes, but don’t write off that old return just yet. You may still be able to amend it, but if the IRS owes you money, the clock is ticking.
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The three-year rule explained
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You may have heard of the three-year rule for amending your tax return. It seems pretty straightforward, but naturally, this deadline primarily matters when you’re trying to get money from the IRS. Generally, you have three years from when you filed your original return or two years from when you paid the tax – whichever is later – to claim a refund or credit.
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And if you’re one of the few that doesn’t wait until the last minute to file your taxes, you’ll be glad to know that filing early doesn’t necessarily start the clock early. For deadline purposes, the IRS usually treats your return as filed on the regular due date.
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What went wrong?
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Before you start digging out dusty boxes of documents, figure out what you’re actually trying to fix. You may need to amend your return if any of the following needs to be corrected:
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Income
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Filing status
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Deductions or credits
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Dependent information
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Miscalculations
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If the mistake means the IRS owes you money, pay attention to that three-year deadline. Wait too long, and the IRS keeps that money in its pocket.
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On the other hand, if the correction means you owe the IRS, waiting around isn’t doing you any favors, either. Interest usually starts adding up from the date the tax was originally due and penalties may apply, so there’s no reason to let an old mistake get any older.
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Not every mistake needs an amendment
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To amend your return, you’ll file Form 1040-X, Amended U.S. Individual Income Tax Return, along with any new or corrected forms and schedules that support the change. And don’t forget about your state return. One amended return has a bad habit of spawning another.
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But before you fire up your printer, make sure you actually need to amend your return. Fortunately, not every minor error punishes you with a ton of paperwork. The IRS typically catches and corrects simple math errors on its own. And if the IRS accepted your return without a required form or schedule and requests it later, you usually don’t need to amend to provide it.
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So, is three years too late? Not necessarily. Figure out what you’re correcting, check the deadline that applies, and take it from there.
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PRESENTED BY TAXQUOTES
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Old return, new IRS bill
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Fixing a return from three years ago can feel like progress, until the correction shows you owe. Interest has been piling up since the original due date. If an old mistake or a few unfiled years have left you with an IRS bill, TaxQuotes finds what’s actually possible for your income and situation and handles everything start to finish.
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Tax Strategies
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👊 Your commission check took a hit. Here’s why.
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I got a big commission check that seemed to get taxed at a much higher rate than my regular pay. Why is that?
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You finally get the big commission check you’ve been waiting for, open the envelope, and…wait, where did all the money go?
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Before you panic, there’s something you should know. Your commission may have been withheld differently. That doesn’t necessarily mean you were hit with a higher commission tax rate.
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Why your commission check looks different
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The IRS classifies commissions as supplemental wages, and employers have a couple of ways to handle federal income tax withholding on them.
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If your commission is paid separately from your regular paycheck, your employer may withhold a flat 22%.
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If your commission is combined with your regular wages, withholding is calculated on the larger amount. That bigger paycheck equals more money withheld.
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If you bring in more than $1 million in supplemental wages this year, congratulations. Oh, and different withholding rules apply to anything over that million-dollar mark.
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Either way, seeing a big chunk disappear from your commission check stings, especially if you already had plans for that money. But before you start side-eyeing the IRS, understand that withholding and your actual tax rate aren’t the same thing.
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Your paycheck doesn’t tell the whole story
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Your commission is still income, and it gets factored in with the rest of your income when you file your tax return.
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If too much was withheld from your commission, that money isn’t gone for good. It is added toward the taxes you’ve already paid and could lower your tax bill when you file. In some cases, it may even give you a refund. So, while the money may be gone for now, it could make a surprise return come tax time.
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That commission check may have been a shock, but withholding is only part of the story. Your tax return gets the last word. And if the math still looks suspicious, take it up with payroll before you take it personally.
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Every Thursday, we go to work.
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The TaxStache Business Edition breaks down the tax and finance topics that actually matter to business owners, from quick intros to in-depth dives. Plus book, podcast, and video recs to keep you sharp, and a weekly download you can put to use right away.
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If you own a business (or you’re building one), this one’s for you.
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Would you like to receive our Thursday Business Edition?
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Businesses & Gigs
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⚠️ That 1099 should’ve been a W-2
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My employer said they misclassified me as a contractor instead of an employee. What does that mean for my taxes?
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Finding out your employer classified you as a contractor when you were actually an employee isn’t just an HR faux pas. It can change how your income was reported, which taxes were withheld from your pay, and how much you were responsible for paying yourself.
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The good news is that your employer caught the mistake. The slightly less good news is that now you have tax cleanup ahead of you.
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The label matters at tax time
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Employees and independent contractors may do similar work, but the IRS doesn’t view them the same way at tax time.
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As an employee, your employer generally withholds federal income tax and your share of Social Security and Medicare taxes from your paycheck. Your employer also pays its share of Social Security and Medicare.
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Independent contractors are usually responsible for paying their own self-employment and income taxes.
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The work may look the same. The tax bill definitely does not.
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Wrong label, wrong tax bill
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Unfortunately, the wrong label can have a pretty significant impact on your tax bill. Because you were treated as a contractor, your employer generally wouldn’t have withheld federal income, Social Security, or Medicare taxes.
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But if you should have been classified as an employee, you shouldn’t be stuck paying self-employment tax as though you were in business for yourself. Instead, you’re responsible for the employee share of Social Security and Medicare taxes. Federal income taxes, of course, always apply.
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Time for your tax cleanup
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Now comes the fun part: fixing the tax problem.
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Start by asking your employer how they plan to correct the mistake and whether you’ll receive updated tax documents. Depending on your situation, you may also need to:
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File Form 8919 to report your share of uncollected Social Security and Medicare taxes (if you meet IRS requirements).
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File Form SS-8 if your worker status still needs to be officially determined by the IRS.
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Amend your tax return with Form 1040-X if you already filed using the incorrect classification.
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If the misclassification also affected your wages or other workplace protections, contact the Department of Labor if your employer doesn’t make the change. Employers that violate the Fair Labor Standards Act may be liable for unpaid wages and additional damages and penalties.
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Being misclassified as a contractor can make a mess of your taxes, but you shouldn’t be the only one doing the cleanup. Find out how your employer plans to correct the mistake and what tax documents you’ll receive. And if they won’t fix it? The IRS and the Department of Labor can step in to offer assistance.
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ALSO PRESENTED BY TAXQUOTES
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When your 1099 comes with a bill
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Contractor pay comes with a catch: nothing gets withheld. Skip a few quarterly payments and the IRS bill can snowball fast. If you’re already behind, TaxQuotes helps figure out what’s actually possible based on your income and situation, and can help stop wage garnishments, liens, and levies along the way.
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Follow us for even more great tips, tricks, and deadline reminders.
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