Discussion:Cleaning Company - 1099 vs W2
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Revision as of 16:59, 16 February 2009
Discussion Forum Index --> Tax Questions --> Cleaning Company - 1099 vs W2
| 25 May 2007 | |
| Over the years I had a small business client or two that stretched the 1099-Misc vs W-2 issue but it was small potatoes. My son wants to start a sideline business that involves evening cleaning of offices etc. He worked for such a business part time for several years and was always paid via a 1099-Misc. I thought that wasn't right but what are you going to do. I am telling him that I don't think he can have this business and "hire" people to do this without making them W-2 employees, paying state workmen's comp premiums and state and federal unemployment tax - after all he directs them when and where to work and what to do. He says all of the local small cleaning companies report their workers pay via 1099's. Total annual gross of this business would probably be about $80,000. Payments to "workers" about $50,000. He says his former cleaning company "employer" was audited by IRS and that was o.k. Is there an exemption for this kind of business? Could that former employer been grandfathered?
I had this idea that perhaps he could form an LLC with him being the managing member and these three workers as other members and all be taxed as "partners" (receiving K-1's) but that seems to be suspect since these members share of the revenues would be linked to the hours they put in. | |
| 25 May 2007 | |
| There's no grandfathering I ever heard of, but a significant segment of the local industry can trigger "section 530 relief." IMO, a possible employer should not rely on that where the dollars ain't that much. Objectively, you're also likely right that they are W-2 workers. Any worker can file an SS-8 determination request, and start the dominoes falling. Then, the workers learn that IRS does IRC 3509 and workers can't get 1/2 FICA refunds. Representation fees before IRS out of proportion to the $$ issue. Workers ain't happy. Full employment for IRS examiners. :-)
As to evidence of a favorable IRS audit of somebody else, that don't mean anything. IRS structure is to allow discretion at lowest level and to the often limited extent they are reviewed. An FOIA request will unlikely turn up (were 5 USC 552 not pushed by IRS) any management memos to examiners on treatment of local janitorial workers. | |
| 25 May 2007 | |
| believe only half of what you see and nothing you haven't verified. Maybe the former employer was too embarrassed to admit the truth of the audit taxea | |
Death&Taxes (talk|edits) said: | 25 May 2007 |
| No matter what, he is going to have to carry Workmens' Compensation insurance which on a 50K payroll doing manual work like cleaning could be very expensive.....he surely realizes the 'subcontractors' are not going to give him certificates of insurance. | |
| 25 May 2007 | |
| Maybe we can rationalize that economic theory causes us to pay 1099 workers more. They think only comparative hourly rate to W-2 workers, and that their tax hit is the full 15.3%. Lower W-2 pay gives us money to pay all the other things. | |
Bottom Line (talk|edits) said: | 25 May 2007 |
| Also think about bonding and insurance. Tough to get on subcontractors and I wouldn't want someone who wasn't bonded & insured to come into my office when I'm not there. | |
| 25 May 2007 | |
The cleaners are W-2 employees as stated above.
The son should have questioned the employer about the 1099. He should have noticed that no taxes were w/h from his pay. I did have a client who gave the cleaner a 1099. The lady came in once a week, during business hours to clean the office. She requested a 1099. My client was surprised at the request. She filled out a W-9 and left her business card to show that it was her own business. She was happy to receive the 1099. | |
| 25 May 2007 | |
| Oh yeh - he noticed that no taxes were withheld - and FICA, Federal, Ohio and City took about 45% of what he had earned (and already spent).
I don't think that the lady who comes to my house every other week and cleans for 3 hours is a W-2 employee of mine - she does such work for numerous people. [Am I supposed to issue her a 1099?] But if she "employed" other people to work for her in that business, I guess they would be W-2 employees of her business. | |
Bottom Line (talk|edits) said: | 25 May 2007 |
| The cleaning lady that goes to your house one day a week would probably not be a W-2.
But if you run a cleaning service that goes to several businesses and/or residences a week, those workers would be W-2 people. Also check your state laws about taxes. In FL, you must collect sales tax for commercial cleaning jobs. | |
| 25 May 2007 | |
| As a former controller for a janitorial services company, you will most likely have employees. Unless you contract out the cleaning to another cleaning company and receive all required paperwork, such as insurance certificates, a contract, etc., you have employees.
Of course, you will still have to pay worker's comp and unemployment insurance (at least in MD you do) on your subcontractors. | |
Bottom Line (talk|edits) said: | 25 May 2007 |
| Thanks Tom | |
| 26 May 2007 | |
| Jake - I hope your son doesn't even think about going the 1099 route. Honestly, it can ruin his life. The workers are definitely employees, and if he's audited the IRS can go back three years. With penalties and interest, the taxes owed can be as high as 50% of the payments to employees. Say $50K per year for three years at 50% equals a $75,000 debt. It's just not worth it.
If other business owners are willing to try for a competitive pricing advantage by treating their workers as independent contractors, that's their choice. You don't need to issue a form 1099-Misc to the cleaning lady who comes to your house every other week (assuming she has her own business and is not your domestic employee). Only businesses are required to issue forms 1099-Misc, not individuals. People who clean business offices should be routinely issued form 1099-Misc, and the payer should obtain their tax ID numbers before cutting the first check to them. | |
| 26 May 2007 | |
| In an IRS audit, and if 1099s timely issued, and "section 530 relief" does not apply, the W/H tax rate is 1.5%. The FICA rate is currently 3.06%. The Congress is likely reflecting the degree to which the workers do not comply on their 1040s. It was enacted to prevent IRS from bankrupting small business.
Even before section 3509 (and cases where there is intentional disregard), for any EE signing a cert the money was reported, employer gets the W/H and 1/2 FICA back but not interest/penalties. I can't recall the typical application of penalties where 3509 applied, but deposit is only 5% of the tax if imposed; FTF can be argued on reasonable cause if some of the factors favor 1099 treatment. IOW, only "49% favor 1099 treatment." I think the history is that while Congress diddled with enacting 3509 which sounds so wrong, they passed "section 530." It's not in the tax Code, but still law. The harm to the Treasury is more so fail-to-files and delinquent accounts if 1099 workers do file. GAO is chronically upset about it, but IRS doesn't have the staffing to make 'em happy. Also, if a t/p is audited and the issue not raised, section 530 relief forever applies unless they were previously treated as W-2 and work arrangement not changed. Could have applied to IRS audit rumor in the orig post. | |
| 27 May 2007 | |
| Two workarounds that may not pass the smell test. (1) LLC where all workers are members of the LLC. Earnings would be on a K-1 for each. Of course they would be "in and out" as they come and go. (2) Perhaps the clients would be willing to pay each worker separately and issue each worker a 1099. We are not talking about more than 3 or 4 workers here and the clients might be willing assuming that my son assembles a competent and trustworthy crew. They are almost desparate to get their cleaning work done right and at a reasonabel cost.
The sales tax issue is something I had not thought about. I need to check Ohio law on this. Ohio taxes a lot of services these days. | |
Bottom Line (talk|edits) said: | 27 May 2007 |
| Please consider bonding and insurance. The lack of these may hinder business growth. | |
| 5 October 2007 | |
| I have a new client who has incorrectly classifed employees as subcontractors. She wants to correct this as soon as possible. Should she switch them immediately to employees or wait till the first of the year to reclass them as employees? i would imagine it would draw attention if the same person received both a W-2 and a 1099 in the same year. Any thoughts would be appreciated. | |
| 5 October 2007 | |
| "i would imagine it would draw attention if the same person received both a W-2 and a 1099 in the same year."
No, it wouldn't. IRS has no staffing to even think of looking for that minutia. They want you to make the change when you discover incorrect worker treatment. | |
Donniecastleman (talk|edits) said: | 5 October 2007 |
| No it wouldn't draw attention by receiving both in one year, I have many clients that start out working for someone as contract labor and they usually just switch mid-stream instead of trying to go back and reclassify all of their income as W-2 income, it's not that big of a deal on the IRS radar. You could probably wait until the first of the year at this stage in the game and start fresh and not have to file the 941 until 2008 tax year. Of course, get the questions out which you've probably already done and definitely determine that you HAVE to file as employees right now, otherwise just wait in my opinion, the top level legal guys will be along shortly to firm up or deny with case law what I'm saying, the floor is yours, I just wanted mainly to tell you that W-2's and 1099's are received from the same employer all the time with no "scrutiny". | |
| 5 October 2007 | |
| It has nothing to do with high or low "on radar," but that looking at all returns received for any one of a thousand odd things is the least efficient way of feeding any staff years allocated to various exam programs, one of which is employment tax. How would IRS do that with efiles? If you don't do the same thing to them, you treat similarly-situated t/p's unfairly. | |
Donniecastleman (talk|edits) said: | 5 October 2007 |
| I've seen both ends of the spectacle, I've seen musical groups go from year to year doing completely sub-contract labor with no problem, all the way to seeing bands break up from dealing with one IRS jerk that tells them to switch to a W-2 format when clearly there are legal reasons to not have to make the switch, or to make the switch. I'm saying that this is a very gray area in some professions such as cleaning companies and musical groups, where you are not in the same place all the time doing the same work with the same people. Now, rephrasing the question, how would you go about classifying the work as sub contract for the rest of the year and starting the different method of pay in 2008? That would be the question in my book, I wouldn't do a thing, in my own opinion, until 2008 rolls around besides to get ready for the switch. I have a cleaning company on my books that has paid 1099's for many years, and the main reason she doesn't pay W-2's is because she doesn't want to spend a small fortune and a boatload of time processing a new person that may only work with her for 2 weeks, her company simply isn't big enough to do W-2's for 20 different people coming in and out over a period of a year, while people that have been with her for a very long time are treated as employees. | |
Outwesttax (talk|edits) said: | 5 October 2007 |
| Though we tend to think of the IRS as the problem, that comes later. The usual situation is a problem "contractor" that you tell you aren't going to use anymore. They promptly go to file unemployment. The unemployment office says we don't have a record of you. The UNEMPLOYMENT auditor comes to talk. I'll guarantee they will classify every contractor as an employee. The business ends up paying state unemployment. Now the state unemployment office passes the information to the IRS. Now it gets into the really nasty stuff mentioned above. And because the business settled with the unemployment people as employees, the business is defenseless before the IRS.
Forget the SS-8, the real danger comes from the unemployment claim. Doug | |
Death&Taxes (talk|edits) said: | 5 October 2007 |
| "her company simply isn't big enough to do W-2's for 20 different people coming in and out over a period of a year,"
My first boss had a client who owned two Dunkin Donut franchises: the proprietor would have loved you, but doing W-2s is part of being in business. | |
| 5 October 2007 | |
| i would imagine it would draw attention if the same person received both a W-2 and a 1099 in the same year. I would fix the situation now, the new form 8919 has a section for a person to check if they previously were treated as an employee but now as a contractor, but your situation is the reverse. Donnie have you looked at the form? There is also a section for a person to check that says, "other people performing the same type of work for this employer are treated as employees". The instructions for the 1099 refer people to this form if they feel they should have been treated as an employee. If you haven't looked at it, I think you should. | |
| 11 February 2009 | |
| Little different facts:
1. Cleaning lady (CL) in her 70's just wanting to help a older couple, not in business of doing this on a regular basis. 2. Pd 2,200 for 2008, no W-2 or 1099 has been issued. 3. CL provides her own supplies, and comes twice a month, not on a set schedule or time to report. Q1: Is CL considered based on facts above an EE or Independent (I)? - I say Independent... Q2: If I where does EE report income? - Even though not a business and no 1099 is required by ER since not in business...Sch C for purposes of SE Tax? Or Perhaps Line 21? | |
