Discussion:Is it legal for an employer to do this
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Discussion Forum Index --> Tax Questions --> Is it legal for an employer to do this
| 21 February 2007 | |
| Hi I am a loan officer for a mortgage broker. My broker pays me 1099 income. However, due to the fact that we have to follow FHA guidelines I was informed that I would now have to be paid as W2 income as opposed to 1099 income. So, my first deal since the switch to W2 went like this... my broker took the commission check paid to us from the title company and took out his broker fees. Next he took out 10%. I asked what this 10% was for and he responded, "to pay my Social Security taxes and unemployment taxes." In the description part of the check he described it as "employee tax." Then he took out my portion of the social security taxes and also unemployment taxes again. I know that it is incorrect for him to take out the unemployment taxes twice... however, my real concern is this... is it legal for him to require me to pay my portion of the Social Security tax (around 7.5-8%) and also require me to pay the employer portion of the social security tax as well(the employer 7.5-8%), thus I am paying the full 15%+ of the social security tax and I paid the 2-3% of unemployment tax twice. I know the latter is incorrect. But the first question regarding me having to pay the entire load of the social security tax... is that legal? Thanks for a response. | |
| 21 February 2007 | |
| I seriously doubt it is legal for an employer to take out the company's portion of SS & MED that they're responsible for paying. The first 10% for his commission, ok I'll give him that. To take out an extra 10% for compensate for HIS responsibility in p/r taxes is absurd. Never heard of this before. | |
| February 21, 2007 | |
| Employers should never withhold unemployment tax from employees' wages. Employees should only pay 7.65% of their gross wages for SS and Medicare withholding. Is your employer including his cut in your taxable and gross wages? Is he including the employer's share of SS and Medicare and unemployment tax in your taxable and gross wages? In general, your taxable wages should only include your net pay and your share of the SS and Medicare taxes withheld at 7.65% | |
| 21 February 2007 | |
| Lets say the commission is $1000 to make it easy. He is taking out his commission split.. say 25% thus $250. Thus I have $750 left. What he then does is take out 10% to pay what he said was the employer portiuon of the Social Security tax and the unemploment tax. so now theres $675.. then he takes another 7.65% for SS taxes(my portion) and the unemploment tax again (around 2-3%). I asked about this, I asked why I should have to pay his part of the SS tax and why Unemploment is being paid twice and he said it's such a small percent that it really should matter to me??? subsequently I am in the process of chaning brokers... but he owes me for a few deals we jsut recently closed. What can I say to make him pay me correctly? Is there any tax statute I can refer him to that shows him he cannot make me pay both parts of the SS tax and pay the unemployment tax twice? | |
| February 21, 2007 | |
| You shouldn't even pay the unemployment tax once. Sorry, I have no advice on how to get him to do it the right way. | |
| 21 February 2007 | |
| agreed... thanks. Maybe someone will chime in with the tax code I can refer him to | |
Rgtaxservice (talk|edits) said: | 21 February 2007 |
| You are getting HOSED!!
Based on your example, your gross of the $1000 commission is $750. From that your employer should only be withholding: 7.65% - Soc Sec - $57.38 Your state tax (in PA it's 3%) - $22.50 Your federal tax (don't have the wage table handy) Your local tax if applicable In PA there is very very small supplmental unemployment tax .15% <-my guess You DO NOT pay the employers share of Social Security or any part of the unemployment (aside from the supplemental in PA) In addition, your employer is required to remit your withholding to the proper agencies. Get everything in writing and accept only checks. | |
| 21 February 2007 | |
| I have checks and he even breaks it out to show my portion SS tax and me pauying the unemployment tax and this is after an entry titled "employee tax" 10%. So let me ask, who can I report this to? The IRS? Social Security Administration? | |
| 21 February 2007 | |
| Yes, report tax fraud to the IRS. http://www.irs.gov/pub/irs-pdf/f3949a.pdf
Be wary - whistleblowers can lose their jobs. You may have to "deal" with the fact that he's hosing you if you don't have any other prospects out there. | |
| 21 February 2007 | |
| Just curious, what is your salary? I think that is the bigger question. Your pay should be based upon that and not on some calculation your employer makes. If your compensation is $1,000, then that's what you should be paid with withholdings according to your W-4. Maybe you should discuss this with him, get your salary set and then if it is not what you believe your work is worth, then you decide whether to stay or go elsewhere. I don't know how this could be fraud unless you have an agreement to what your compensation should be and then, I still think it's your employer being really not very smart to report it to you the way he/she is. | |
| 21 February 2007 | |
| Its wrong as described.
But when the broker is shown the error of his/her ways, your next check will just have a broker fee +10% off the top deduction. With no mention of what the 10% is for except an increase in broker fees. You work for a greedy broker, who wants to pass along all of his costs of having employees to the employees themselves. Rest assured these costs will get passed along in some name or form. | |
| 21 February 2007 | |
| I agree with the professional responses above in the way the problem has been described by the OP. However, I am going to play devil's advocate. That is, for all you business owners, your cost structure suddenly changed due to factors out of your control. What do you do about it?
First, let's go back to "Day One" when the broker finds out he now has "W-2 employees" rather than "1099 independent contractors". (Why FHA guidelines are determinative rather than the 20 factor test and facts & circumstances I have no idea, but that is a moot point for now.) The broker now has increased costs and as a business person he needs to make a business decision whether to 1) absorb those costs; 2) completely pass them on to the employees; or 3) share the costs with the employees. IF OPTION 1 IS CHOSEN The commission structure stays the same (75% / 25% per the OP's example). The employees are happy because nothing much has changed for them as they were already paying SE taxes on their schedule C (albeit slightly less becasue of the .9235(?) factor). The broker is not happy becasue his 25% just got reduced to ~17% AND he has increased compliance burdens; e.g., payroll tax returns, workers compensation insurance compliance, etc.) IF OPTION 2 IS CHOSEN The commission structure gets changed to roughly 66 2/3% / 33 1/3%. The broker is happy because net he still has 25% net after paying the ER portion of payroll taxes / workers comp / etc. He has some compliance burden now, but he is about in the same place cash-wise as before. The employees are not happy becasue their take-home pay decreased by roughly 5-6%. Why not by the full 8 1/3% (75% - 66 2/3%)? Because reduced earnings involve reduced SE and income taxes. Still, no one wants a 5-6% pay cut. IF OPTION 3 IS CHOSEN The broker and the employee figure out an equitable arrangement. WHAT DID THE BROKER DO WRONG? We really don't know if there was any communication or miscommunication, but that is the likely culprit. With all due respect to the OP, we are only getting one side of the story. Jefeb may be entirely correct, but I am not in a position to know for sure. If Jefeb is correct, the broker did not communicate the fallout of the switch and offer options to the soon-to-be employees. Better producers may have been offered better deals than lower producers; other incentives may need to eb invloved to keep people from quitting; etc. OTHER FACTORS Who are the competitors? E.g., won't every other broker be subject to FHA guidelines and therefore need to have an employER - employEE relationship with the producers? If so, how much of a better deal is Jefeb really going to get from another company. Under state law could the broker legally change the commission structure without sufficient notice to the employees? As Yul Brynner said in "The King and I", "Etcetera, etcetera, etcetera." My two cents . . . | |
Rgtaxservice (talk|edits) said: | 21 February 2007 |
| Gatto - What's OP? | |
Rgtaxservice (talk|edits) said: | 21 February 2007 |
| Got it (actually my wife did and just told me) - Other Person | |
| 22 February 2007 | |
| Jefeb, no it is not legal for your broker employer to do that.
If you don't have other job options, you don't have much recourse. If you do have other job options (because you'll likely get fired for complaining), write or call the IRS and complain about it. You may also want to file a complaint with the real estate licensing board in your state. | |
Actionbsns (talk|edits) said: | 22 February 2007 |
| The reality is that the people who were on commission will now need less to pay taxes because thay won't be responsible for the entire amount of FICA/MC, so in a company meeting, these issues need to be addressed and everyone needs to come to an agreement on a changed schedule and understand why. The paychecks also need to be prepared correctly with deductions taken appropriately. That doesn't seem to be happening and they should probably seek out a payroll service to correctly prepare payroll and do the necessary tax filings. This is going to be a nightmare at the end of the quarter. As for the FUTA and any SUTA that might be due from all this, as the broker said, it's such a small amount nobody should be concerned with it, so he should just do the right thing, and pay it. | |
| 22 February 2007 | |
| When "by the OP" = Original Poster; when "in the OP" = Original Post. | |
| 22 February 2007 | |
| Another choice would be to contact local/state agency, example, EDD
(Employment Development Department) as well as Dept of Real Estate, your state tax board etc..... I imagine one of these agencies if not all will get to the bottom line. | |
| 22 February 2007 | |
| Actionbsns: You are absolutely correct. I completely flaked on the fact that the 1099-producers were paying both sides of the SS tax. (At least if they were properly preparing their T/Rs.) Thanks for pointing that out.
The other issue I forgot to mention is one of the disadvantages to the producers of now being employees. They probably have less options regarding retirement plans. For instance, some may have had SEP-IRAs or the like and the high producers could have socked a lot of money away. Now they probably do not even have a 401(k) available and they will be limited to IRA amounts. Hopefully the broker, to be competitive, starts a 401(k) for the employees. | |
Bottom Line (talk|edits) said: | 22 February 2007 |
| Jefeb - you don't say what state you're in but I believe mortgage brokers must be licensed in most states. You may want to speak with the state licensing people. I'm in Florida. The mortgage guy that handled my house loan is also a tax client of mine and a friend of my husband. Since he doesn't have his mortgage broker license he gets a W-2 and has never gotten a 1099. I'm not sure how his commission structure works but he did have the authority to lower the loan cost to us. | |
| 13 October 2007 | |
| I know this is an old discussion, but for future readers I thought it would help to add a little about how loan officers are traditionally paid. Some companies have always regarded them as independent contractors. However, due to the massive level of loan fraud, many states are now statutorily requiring that loan officers be W2 employees in order to hold the employer responsible for controlling their actions and for the results of their actions. In addition, in order to originate FHA loans, HUD requires that there be that employee level of control for just the same reason. Some states don't require it and many mortgage licensees don't originate FHA loans so many are still paid as 1099 contractors.
A commission split with 75% going to the loan officer for a retail shop that originates FHA loans is far above a normal commission split. The norm is 50 or 55% to the loan officer, 30 or 35% if the office is providing them with leads. There are however, many "net branches" that offer commission splits up to 100% (with the office making profit on administration fees and interest rate spread) evade the rules in just that manner - by charging an administration fee before paying the commissions out. So depending on the circumstance, it may or may not be fair for the employer to ask for a commission split reduction. On average 75% is very high, and speaking from experience such a split would make employing that loan officer unprofitable given the expenses that the loan officer generates for the office outside of the employer portion of payroll taxes | |
Meyerbooya (talk|edits) said: | 1 July 2008 |
| This problem is still being dealt with currently. I have a client that is a mortgage broker and pays loan officers who are 1099 contractors. Due to the FHA ruling, they are paying W-2 wage for only those loans that are FHA originated. All other loans are 1099. Do you see this in practice? I understand why and when asked if this is okay, yes because the loan officers still meet the independent contractor test, but are just required to W-2 wage due to the FHA guidelines.
They have had to put much time and effort into different contracts so that the officers understand and know how they will be paid and how they will be taxed. FHA loan originations are a sure seller, however, can carry a hefty broker fee due to the requirements taken on by the company. When FHA made this requirement, I do not believe they even thought about how this would affect those in the industry in relation to tax. These loan officers meet the independent contractor criteria and trying to educate why they now must receive a W-2 wage with reduced earnings is difficult. | |
