@ M.C.: Without commenting on whether what your boss is doing is proper (there’s pages and pages of material out there about what constitutes an employee vs. an independent contractor relationship), I’d say you’re partly in a bad situation and partly in a good situation.

The bad news is that you must pay both halves of the payroll (Social Security and Medicare) tax instead of your employer paying half. Assuming your compensation from your boss is less than $102,000 in 2008, you’re paying 15.3% instead of 7.6% in payroll taxes. Multiply that by your compensation and you’ll likely see that’s quite a chunk of change that’s coming out of your pocket.

The good news is that – as an indepdendent contractor – many more normal business expesnes are deductible than would be if you were categorized as an employee. This is because you must itemize (and meet other hurdles) to benefit from unreimbursed business expenses you incur as an employee whereas an independent contractor can pretty much deduct them on Schedule C.

Please note that just because nothing is withheld during the year does NOT mean you do not have to pay anything during the year. (Said without the double negative: it’s quite likely you need to be paying taxes before next April.) If you expect to owe tax, you’re supposed to make estimated payments each quarter or you may owe interest and penalties (for under-paying during the year) come next April. I don’t know your specifics, of course, but note that it’s possible that the only reason you haven’t got burned by your not paying quarterly thus far was because you benefited from a low prior year tax (see main post above). That may not continue in perpetuity.

See what happens when you ask a good question?

Consider looking at http://www.irs.gov too.

My boss pays me in full every week without taking taxes. Does this mean that I work for her company or am I in essence my own company and she my client? She claims me at the end of the year and I in turn owe A LOT of taxes. I fully understand that it’s better to get more in your paycheck since you get the interest, but is it a good thing or a bad thing that she claims me at the end of the year and pays me in full the rest of the year? No I obviously do not get any benefits…
Am I in a good situation or a bad one?!?!!

Thanks Michael!

I have been a periodic reader of your blog lately (full-time reader when I was only working 40 hours weeks, but now its more like 80-90 weeks with a new job and graduate school decisions). I have essentially been doing this approach so far with my new job this year, but I was never able to actually find those simple answers to how much you need to have withheld to not be fined. Thank you so much for those simple suggestions, because I’m well aware that every little bit helps!

Thanks and I’m looking forward to more beneficial suggestions in the future!

-Jeremy