Discussion:Question for sub contract labor paid by sole prop
From TaxAlmanac, A Free Online Resource
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Question for sub contract labor paid by sole prop
| 11 November 2006 | |
| OK...I am full of questions today :)
Another client has a very lucrative business and is operating as a single member LLC (Schedule C). He purchased this business in 2006; so this is the first year of taxation for him. I am doing the year end tax planning and financial statements for him and it seems as though he has been paying employees throughout the year part wages but mostly cash...green money on top of the taxable wages to them. This amounts to over 30K for the year...same guys each and every week.... He gets alot of cash sales in his business and for the cash sales he keeps in a lockbox and uses them for cash labor, gas, etc. I don't have SS#'s for many of them and for the ones that I do, they are on payroll....but they can't get both a w-2 and a 1099. I have explained to him that this is a very very big no-no but he refuses to pick it up as wages for w/c reasons, matching fica reasons and because these employees will resign if they have to report the income.... How should I handle these payments if the client will not allow them to be recorded as the wages they are? Another ethical situation, but I have advised him and he will not cooperate :( | |
Death&Taxes (talk|edits) said: | 11 November 2006 |
| Sandy, do all your clients like doing things on the shadier side of tax law? That's a joke, but I do remember the man who took over a mom and pop bakery and tried to stop the cash train only to have the two bakers walk out. My advice is to tell him that you cannot work this way. If you can find the court case, Francis H & Delores McLaughlin vs Commissioner, TCM 1987-156, you will find out what happens when IRS runs into these situations. I prepped this case for the attorney, negotiated with IRS only to find they did not like Mr. McLaughlin. The principles are somewhat the same, but what we did have was records of payments and a number of workers who came to court to testify that Mac McLoughlin did pay them. Pre-trial IRS counsel turned down my offer that we pay FICA and 15% income tax on all those who did not pay taxes. He said to me, "McLaughlin is abetting others to commit tax fraud, and whoever prepared the return is doing so also.' This was the attorney. My boss thought IRS was foolish, for now the case turned into whether the petitioner had paid the men, not whether he had done it the right way. One of the men actually told the judge he had not paid tax on the money because 'it was only a couple of thousand dollars' or something like that. Read the case if you can find it; it is very instructive. | |
| 11 November 2006 | |
| Can anyone tell me how to find the case that D&T is refering to? I would like to read it. | |
Death&Taxes (talk|edits) said: | 11 November 2006 |
| If you message me a fax # I will gladly send it to you. One big difference: McLaughlin's gross income was reported via 1099; he paid his men with cash, but he did not give 1099s. Sandy's case is one where the 'employer' is taking it off both top and bottom. | |
| November 11, 2006 | |
| Sandy, sad to say, but this is a walk. If he refuses to obey the law, even a little bit, you've got to go. He's got trouble all around him. Imagine when one of these folks get ticked off or hurt and explains that they were getting paid lots more than the paperwork shows...it will happen one day. Guarantee. Not as smart as he thinks. A guy might hide cash from the gov for a long while, or forever if he's clever enough. But this guy has a ring of folks like that. One of them will go down, and he'll be next. | |
| 12 November 2006 | |
| You know too much about what they are doing. Drop them as a client. You will sleep alot better. | |
Bottom Line (talk|edits) said: | 12 November 2006 |
| Hate to join the parade in telling you to drop client but I agree and will give you another example of where he can get in trouble. Florida contractor was paying workers 40 hours through W-2 but was paying extra hours through 1099 so he didn't have to pay time and a half. Got caught in a workers comp audit! Huge money in extra workers comp and workers comp reported the descrepancy to FL Unemployment. You got it! Amended UCT-6, amended 941, 940, W-2 with resulting interest and penalties! | |
| 12 November 2006 | |
| Ohhhh; here we go again....I think the client WANTS to do things the right way, but he is "cash poor"...;bad business decisions re: cash advances on ccds, etc.
I am tired of walking away from good paying clients JR...but of course I can't hide 30K in cash expenses. I will have to gross it up for at least fica at year end and hit him with the tax bill for the gross up. Yes, I tend to find these clients; I happen to attract the ones which are all out of options it seems but they know where I stand on ethical issues.... | |
| 13 November 2006 | |
| I think we all run into similar situations continually. Business owners will naively or intentionally keep workers as sub contractors as long as they can. The clients I have acquired who have been lax on employee vs. sub and/or employee and sub in same year, I have been fortunate enough to convince them that they can't have it both ways and are taking a huge risk (also included in engagement letters) by not classifying workers correctly. The worst part is when they have paid as sub contractors, taken the deduction and not issued anything, 1099 or W-2. Question, should I allow these clients to issue both a 1099 and a W-2 for the same person in the same year? We're going forward correctly, but what do I do about what has already happened? Some cases, I have been engaged to prepare prior year return, thus come into the situation way after the fact. Sometimes workers are long gone and no SS#, etc. Should we just not take the deduction? This continually nags me and honestly scares me. | |
| 13 November 2006 | |
| New client came to me with all the red flags...A box of unopened IRS letters, payroll returns that hadn't been filed, and a long sob story about wanting to fix everything, and go forward "doing the right thing." After months of cleanup, the contractor that he was by nature took up his old habits of paying all his guys cash. I finally had to tell the client that he was facing prison time, and that I did not want to follow. | |
Bottom Line (talk|edits) said: | 13 November 2006 |
| I don't have a problem with issuing 1099 and W-2 to same person in same year. Some companies intentionally do a "try it before you buy it". Also we're seeing a lot of corporate america downsizing employees then hiring them back as subcontractors. When worker is long gone with no SS#, I still issue a 1099. You'll get a letter back from IRS asking for the number and saying that if you pay them again, they are subject to backup withholding. That's the time for a prayer meeting with the client. I usually spot check my tax clients a couple of times a year (tax planning and to help keep the relationship). At that time I look at their 1099 list and remind them to get info. We all know that in January these people disappear. For those that insist on paying cash, I include it as owners draw and explain to them that they are paying a higher tax bill because of undocumented cash payments. Usually gets their attention. | |
| 13 November 2006 | |
| I agree with Bottom Line. We issue both W-2 and 1099 in same year in cases. Just be sure to include both for workers comp calculations and work comp does not have a problem with it. | |
| November 13, 2006 | |
| IRS does not want W2's and 1099's issued to the same person in the same year. So I rarely do this and discourage it. An employee on a trial basis we switch when they hit $600, or include the previously untaxed monies into the salary once converted. As to filing blank 1099's, you're asking for fines. One day, IRS will send a bill. This is an area where I just don't play or allow much play. The risks are high, and the ease of being caught is low...figure it out. I've seen clients go out of biz for disobedience in this one... | |
| 13 November 2006 | |
| Thank you all. I have never, as JR has never issued both 1099's and w-2's to same employees, but perhaps this year it would not be a bad scenario. I usually gross up the 1099 amounts to the wages if the employee has been hired. This is so convoluted because each week he pays them 1/2 wages and 1/2 cash. Anyways, this is an option for this year I am willing to try...no need for the employer to have to bite the sole prop bullet on self employment for wages he paid to workers...thanks again! | |
| November 14, 2006 | |
| Another story -- a close friend of my husband's had a lucrative business. Most revenue was in cash. IRS audited and friend was found guilty of tax evasion. Business folded. Former employee started similar business. After house arrest was up, friend was unable to start up business again. Several years later it is hard to find employment -- criminal record will be there for the rest of his life. | |
| 14 November 2006 | |
| I totally agree that the IRS does not want a W-2 and a 1099 issued to the same worker doing the same work in the same year. However, once you have convinced a business owner that their subcontrators are employees and they agree to go forward correctly, most if not all do not want to go back and reclassify earlier payments in the year as wages, which would be the correct way to do it (even if you considered all earlier payments as advances and converted to wages in the current period - wrong, but at least it is correcting the earlier errors). My question is, does doing so (issuing both) raise more concern than not? | |
| 14 November 2006 | |
| The way I handle these kinds of situations is to advise the offending clients each year, verbally and in writing, of the correct way to do payroll. My letter also tells what may happen if the contractors are reclassifed to employees. I give one copy to the client and keep 1 copy for the file. While you cannot force the client to do payroll properly, you do have a duty to advise the client. If and when the client is caught, you may need to be able to show you advised the client correctly. | |
| 14 November 2006 | |
| I also give them a letter like Taxfef mentioned, I also put in there what the penalty is for failing to do it correctly. | |
To join in on this discussion, you must first
log in.
