Employee vs Contractor issues

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#1
Soups  
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Hello Professionals.

I do payroll for a local non profit that I am a member of. The non profit in question has all the local business as members and is established to promote and protect the interests of its businesspeople members.

I was informed this week that they are reopening. Then they told me that the program director that has been a w-2 employee in 2019 and some in 2020 will be considered an independent contractor for 2021. On the phone I told the current president that I believe the program director should be categorized as an employee. I went through all the factors here ( https://www.irs.gov/newsroom/understand ... lationship.) and told her that the board should contact a labor lawyer.

I was told that there is not enough money to pay wages so they are making the change no matter what. I have a few questions as to how I should proceed.

If something goes wrong and the IRS determines that the program director should be an employee could I be held responsible? I am a member (not on the board) and have access to the EFTPS and state payment systems and print the payroll checks. I don't believe any of these by themselves would be an issue but I am not sure if combined, could be liable for penalties and the like?

The only contact that I have had with the non profit is a phone call with the president. Should I send a letter or at least an email telling them to my opinion and telling them to talk to a labor lawyer.

Sorry for taking up anyone time who is reading this because I am just trying to cover my butt. Any incite would be welcome.
 

#2
JAD  
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You do the payroll and you know that the payroll taxes are going to be understated. I can't speak to exactly the extent of your liability because I don't do payroll and therefore don't pay attention to those rules, but I'd be surprised if you are without liability. I think the bigger question is this: if they are going to do something that you believe is not consistent with the law, then why would you do the payroll? Just tell them that you cannot in light of this new situation.
 

#3
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I dont necessarily disagree, but, from a practical perspective, if they aren't paying payroll, then why will you need to be involved?
There's nothing significant to writing a payment to a contractor.
~Captcook
 

#4
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I would send a follow up email to summarize the call and memorialize the conversation, then save to file. You can put all of your thoughts in there, including that the employee vs IC determination is a matter of fact and circumstance, not of preference, and that they should consult a labor attorney for the correct determination.

I hate hearing about situations like this, because most often it is the (former) employee who ends up getting screwed. I see it a lot when someone moves abroad but both the company and the employee want the employee to keep working remotely for the US Co. They start paying the employee as an IC to avoid tax nexus with the foreign country.

The (former) employee never takes into consideration the higher tax hit, the QBI complications of this arrangement, cost of a foreign and US tax advisor, etc, and almost always ends up making less because they don't know enough to negotiate for a higher fee. Essentially, they end up subsidizing their own employment to the company. Once they figure that out, it's not a great feeling for them.

If they don't have enough money to pay wages, then there is no payroll and perhaps this is now a former client? Or do they not have enough money to pay certain wages?

If it's not a large account and the decision isn't political, I'd consider disengaging and opening up space for a new client. If they're willing to cut corners in bad times that usually doesn't quickly change once things get better.
 

#5
Soups  
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Thank you for the responses

CaptCook wrote:I dont necessarily disagree, but, from a practical perspective, if they aren't paying payroll, then why will you need to be involved?
There's nothing significant to writing a payment to a contractor.


Capt there will still be payroll for the secretary just not the Director.

ManVsTax I agree but, a large portion of my client base is in this organization. This job is one I do for free, it is really hard to make those free clients go away.
 

#6
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Soups wrote:Thank you for the responses

CaptCook wrote:I dont necessarily disagree, but, from a practical perspective, if they aren't paying payroll, then why will you need to be involved?
There's nothing significant to writing a payment to a contractor.


Capt there will still be payroll for the secretary just not the Director.

ManVsTax I agree but, a large portion of my client base is in this organization. This job is one I do for free, it is really hard to make those free clients go away.


Then, I would suggest you help them find a different solution (lots of online options) or they change their decision. They've changed the "goalposts" and you are free to change your willingness to be involved.
It doesn't sound like they weigh your advice very heavily. If that's the case, they are better working with someone else anyway. Take the time you'd otherwise spend on this organization and spend it serving your paying clients at a higher level.
~Captcook
 

#7
j3cpa  
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The board make the decision and I don’t see how you would be liable for anything with the IRS, in the event that the NFP gets audited and make the reclassification.
 

#8
belle  
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I'm assuming you will also be preparing the F 1099-NEC for the organization? That alone, in CA anyway, can *supposedly* subject you to penalties (1) for just preparing the F 1099-NEC for a client when a W-2 should have been in play. Illinois may/may not be the same.

(1) I've asked this question twice of Spidell (great CA resource) and the answer has been "we think you'd be liable". Seems really dictatorial; but it IS California.
 


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