1099 but should be an employee

Technical topics regarding tax preparation.
#1
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I have a client who is receiving a 1099 but clearly should be an employee. We want to file taxes but don't believe that the client should have to pay self employment tax. Any advise on how to report the income to file but avoid paying the self employment tax? I was thinking of classifying them as a statutory employee?
 

#2
MilesR  
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Don't think you can... at least ethically.
Just get some deductions and try to get it down.

How big of a 1099? Was it on the 1099-NEC or on the MISC? I saw a lot of businesses (incorrectly) send out MISC instead of NEC which in that case the IRS computer might not catch it being reported as "other income" instead of on a sch c.... just sayin.
 

#3
JAD  
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You file this form

https://www.irs.gov/pub/irs-pdf/f8919.pdf

to pay in your client's share of SS and Medicare and file the SS-8 (see form instructions)

and cause a big problem for the person who thought that your client agreed to work as an independent contractor.
 

#4
MilesR  
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You can go that route if the client doesn't care about severing ties with the "employer" as they'll probably not be wanted back.
I had this issue before and after getting some deductions and stuff the tax would be less to be self-employed so the TP changed their mind and decided to be self-employed instead of on payroll.

Depends how big the 1099 is.
 

#5
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the 1099 is over 300k. The client no longer works for the employer.
 

#6
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File both form SS-8 and 8919
Because on T.A. ten was the most you were allowed
 

#7
TheGrog  
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Just be aware that this may well end up in court depending on how solid your 'I'm an employee' argument is.
 

#8
JR1  
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300k??? On a 1099? There's a lot more to this story and I'd be cautious about believing this client's take on things.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#9
NYCCPA  
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TheGrog wrote:Just be aware that this may well end up in court depending on how solid your 'I'm an employee' argument is.


Wouldn't the "I'm an employee" argument be only as solid as meeting the requirements set by the IRS defining what an Employee is vs. an Independent Contractor? If OP is stating that the client is "clearly an employee" then wouldn't they be an employee? Unless OP is completely misreading something. There is another thread going in the Forum where the parties want to agree to an IC arrangement where the individual working would "clearly" be an employee, at least as the IRS defines it. And so, what takes precedent, an arrangement between parties or Facts as defined by the IRS?

A spouse of a client was issued a 1099 rather than a W-2 for 2021. The owner of the business stated, "1099 is fine..." Meanwhile, when I review the Employee classification requirements, as stated by the IRS, the spouse was clearly an Employee. I did my job and notified the Taxpayer about the situation. Fortunately, it was only a few hundred dollars in FICA taxes so the client chose not to file the SS- and 8919. But if it were on $300k of income and my client was clearly an employee, I'd fight it on principal alone.
 

#10
JR1  
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Any agreement is totally worthless in determining employee/IC status. Well, ok, it's 1 of the 20 factors, but doesn't have much control in light of all the others.

My point is that when there's 300k on a 1099, something suspicious is on. No one earning that didn't know. So some arrangement was agreed to for unknown reasons so far. I'm reluctant to get into these things except for when I see younger folks being taken advantage of.

So I just wonder what's really going on?
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#11
Frankly  
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A person that is "clearly an employee" and is improperly issued a 1099 cannot fix it or mitigate the tax effects by reporting fake expenses. Employee expenses are not deductible and going along with a wrong 1099 only perpetuates this tax evasion practice.
 

#12
JR1  
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Well, it's MoCo's opinion that this is 'clearly an employee'. We don't know how that conclusion was gotten to. And I'm reluctant so far, to get there without more facts.

To sum up the law on this: Did the 'employer' have the right to control the details of this client's services? That's the bottom line on this stuff. Not whether they did, but had the right to. My clients don't have the right to tell me how to do my work, when, what software to use, etc. They have only the right to agree to what services are provided and at what price. So just because I claim to be an employee of some client to avoid the SE tax I didn't save up, or to get into a retirement or health plan that looks really good to me after the fact.....it's rear view mirror manipulation, quite often.
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#13
MilesR  
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Well in that case (300k on 1099), keep in mind you'd only be fighting over the employer's share of FICA which would be about $11k. Being in the higher brackets, I'm sure you could scrounge up $30k of deductions to save enough income tax to make it a wash. Obviously, you can't deduct home office, mileage, etc if you go employee route, but you can on a sch C. Then also get a SE health insurance deduction, and why not do a SEP while you're at it (assuming on extension). Then the TP would be better off and it wouldn't matter. No fighting and extra stress needed.

Also: if the TP or family had covid during 2021, go for the tax credit for SE sick leave too. This wouldn't be available if you fought over being an employee.
 

#14
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I had a client who was paying someone incorrectly as a 1099 (sales position)
The 1099s recipients husband worked at a large firm in NYC. They filed an 8919 or similar divulging the incorrect classification, with my clients business name, EIN, etc. The amount was not greater than $20k if I remember correctly. I was dreading the notice that would come from it, but shockingly nothing ever came from the situation that I am aware of, this was probably 6+ years ago.

My suggestion in these situations is to always try and work it out between the 2 parties.
Far cheaper for the employer to cough up the $11k than to face a potential employment audit.
If it were my client (the business) I would recommend they pay the difference, and correct action moving forward.

Agree that $300k on a 1099, and the recipient "didn't know" seems awfully fishy.
Everyone that works a job is well aware of the tax hit you see on a paystub, a lesson learned by most of us in our mid teens at our first jobs.
 

#15
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MilesR wrote:Well in that case (300k on 1099), keep in mind you'd only be fighting over the employer's share of FICA which would be about $11k. Being in the higher brackets, I'm sure you could scrounge up $30k of deductions to save enough income tax to make it a wash. Obviously, you can't deduct home office, mileage, etc if you go employee route, but you can on a sch C. Then also get a SE health insurance deduction, and why not do a SEP while you're at it (assuming on extension). Then the TP would be better off and it wouldn't matter. No fighting and extra stress needed.

Also: if the TP or family had covid during 2021, go for the tax credit for SE sick leave too. This wouldn't be available if you fought over being an employee.


^^This. (and what others have answered similarly)

Don't go to war. Everyone loses.

Pay the SE tax, find some legitimate deductions to offset the difference from the FICA that would be paid as a W2 employee anyway.

And your fee for the Schedule C.
 

#16
Frankly  
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ItDepends wrote:Pay the SE tax, find some legitimate deductions to offset the difference from the FICA that would be paid as a W2 employee anyway.

If a taxpayer is an employee and the employer failed to withhold tax and issued the wrong tax form (1099) at the end of the year, there are no "legitimate deductions". Receiving a 1099 improperly issued does not give rise to self-employed business deductions. Deductions are allowed only if the taxpayer is a legitimate self-employed independent contractor.
 

#17
JR1  
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Frankly, you're assuming much here that is not yet in evidence. IF is the operative question....
Go Blackhawks! Go Pack Go!
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