FORM 1099 OR w-2

[TAXMAN]

Lets see what someone else would do. TP self employed decides to open new location. Needs lots of construction work done. Hires a worker who presently laid off to do some of the work. TP provides all the materials per spec sheet. Worker does the work over several months while also doing other jobs for other people and old employer. He and TP decide he will get $15.00 per hour. After 2 weeks worker tells TP he has worked 30 hrs. This goes on for about 3 months. TP wrote checks for the hrs @15. whatever the worker told him.

Is worker w-2 or 1099? I ask because worker is attempting to draw unemployment using hrs he work for TP. By the way TP and worker are in Virginia and work is in Virginia.

What do you think? Thanks to all

[Gail in Virginia]

It is hard to say what the unemployment commission will decide - sometimes their decisions are reasonable, but they tend to weight in favor of the employee. However, is the self-employed TP in the construction business? Did the worker provide his own tools, set his own schedule, provide his own insurance? Were there any sub-contractors involved? Who hired them? Who got the building permit and was listed as the general contractor? Was this the same kind of work that the worker was doing for other people? When the TP and worker decided on $15 per hour, was any mention made of whether or not he would be contract or employee? Was any written contract drawn up? I think I would ask at least some of these questions in order to be prepared to present a case for my client.

[ed_accountant]

It sounds like the TP hired a part-time employee. Taxpayer should pay the employer payroll taxes and file the appropriate payroll forms including W-2.

[kcjenkins]

In my state, the Labor Dept will ALMOST ALWAYS sides with the worker being an employee, but ESPECIALLY when his payments are based on 'hours worked'. Unless he had a signed Contract that clearly states somewhere within it "The undersigned understands and agrees that he is contracoting as a self-employed person and is responsible for his own taxes and insurance...." your client should expect to pay up.

[Medlin Software, Dennis]

When not abundantly clear it is/was an IC relationship, it is usually because it was not.

Points towards employee:

$15 an hour, paid on a regular cycle, as reported by the person doing the work (not by the job).

The pay rate itself.

Points towards IC:

Nothing I see in OP would lead me to make the IC argument.

For me, I would take my medicine of trying to get by on the cheap. I would also report the person to the state licensing board for trying to pass themselves off as a contractor.

(My bolding)

The Virginia Code defines “contractor” as follows:

[A]ny person, that for a fixed price, commission, fee, or percentage undertakes to bid upon, or accepts, or offers to accept, orders or contracts for performing, managing or superintending in whole or in part, the construction, removal, repair or improvement of any building or structure permanently annexed to real property owned, controlled, or leased by him or another person or any other improvements to such real property.

[Jack from Ohio]

I think the worker is trying to scam the system. TP should have asked for an invoice. Worker is trying to freeload. Just my opinion. I see this kind of thing in my town and county all the time.

[OldJack]

>>TP provides all the materials per spec sheet.<<

I would argue, that based on the facts in this post, that this worker could be classified as an independent contractor. One factor "TP provides all the materials per spec sheet" indicates that the worker was verbally "contracted" to provide a service in accordance with the spec sheet and the Payer did not supervise his work or give him time limits/schedule to perform the work. There must be several factors to make him an employee. Even if the state labor department classifies the worker as an employee does not demand the same classification for federal taxes.

[TaxMan60601]

Although it comes from a newbie, one more vote for Independent Contractor.

I am completely agree with OldJack.

Besides, you can always check with the Service.

http://www.irs.gov/B...d)-or-Employee?

[jainen]

>>check with the Service<<

The original post is about Virginia Employment Commission, not IRS. There may be technical or procedural differences in defending against the claim. The client should be referred to a professional, most likely a labor attorney, who already knows how to handle the issue. An early error could lead to expensive state and federal audits with even more expensive results. This might go beyond UIB to Social Security, Worker's Compensation, and more.

In my opinion, the original post describes an employee relationship. It refers to the worker as an employee of others, and the worker was only paid for personal service time rather than job results. There is no mention of the worker having a separate business, or even a contractor's license so employee may be the only legal relationship. My guess, supported only by the level of compensation, is that the client knew and intended to take advantage of the fact that he was not hiring a contractor. If he whines about the consequences, remind him how lucky he is that the construction worker was not injured on such an informally supervised job!

Jack from Ohio thinks the worker is trying to freeload. I think the employer is trying to freeload.

[OldJack]

>> Worker does the work over several months while also doing other jobs for other people and old employer.<<

This worker is self-employed working for multiple business as any contractor would do.

>> After 2 weeks worker tells TP he has worked 30 hrs.<<

This is like an invoice even if it is verbal. The fact that he is billing at an hourly rate is irrelevant as this is a normal contract for "time and material" without the material (probably for safety of payment to avoid liens). Obviously, the property owner is not keeping time and directing the work as he would if an employee.

I would argue that this is an independent contractor situation. Tell me the overpowering facts that make him an IRS classified employee.

[kcjenkins]

Jack, I agree with you that the worker is trying to have it both ways, a classic 'freeloader' ploy. And I agree that it has some significant characteristics of IC Still, this post was about state labor law treatment, not about income tax treatment. And the fact is that every state I've ever dealt with on this issue leans heavily on the side of the worker.. So unless he has a written Contract, a detail not mentioned in the OP, he's most likely going to be screwed. And the IRS will then happily use that determination against him.

And I totally agree with Jainen, on the " If he whines about the consequences, remind him how lucky he is that the construction worker was not injured on such an informally supervised job!"

I suggest everyone read this article about the problems that misclassifing can cause.

http://www.forbes.com/sites/robertwood/2012/11/15/new-crackdown-on-using-independent-contractors/

[jainen]

>>the overpowering facts<<

You know it's not that simple, OldJack. The IRC just refers to "the usual common law rules."

To my mind, the financial arrangements strongly suggest an employee. You say hourly payment is irrelevant, but in Pub 15-A the IRS warns that it "usually indicates that a worker is an employee." This particular worker doesn't seem to have any exposure to profit or loss. If materials are stolen, it's not his problem. If there is an efficient shortcut, it's no benefit to him. Unless he is providing significant equipment or transportation or something, I don't see that he has much investment in his work.

What the IRS does consider irrelevant is the lack of supervision. "Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved.....The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right." In other words, if the worker got drunk would he still get paid when he sent his drinking buddy to cover for him?

None of these are "overpowering facts." Neither is having multiple employers. Neither is the lack of a written contract, though it would certainly look a lot more like a separate business if it were conducted in a business-like manner. I think the client will have trouble proving his point, and because the ruling may well roll over into other areas, he really needs to be transferred to someone who knows what's going on in the Virginia Employment Commission.

[Jack from Ohio]

I wonder if the amount of unemployment the worker receives will cover the taxes the worker will now have to pay on the wages he earned. If it is decided that the worker was an employee, then the employee will pay SS, Medicare and well be issued a W-2.

Support for my comment about scamming the system. The worker was not concerned about any of those things, just getting unemployment. Such is becoming the state of our country...

[OldJack]

I wonder if the amount of unemployment the worker receives will cover the taxes the worker will now have to pay on the wages he earned. If it is decided that the worker was an employee, then the employee will pay SS, Medicare and well be issued a W-2.

Just because the state unemployment agency classifies the worker as an employee and collects unemployment tax does not mean the worker is an employee for federal withholding and does not have to issue a W2 verses a 1099. The last I knew federal and state are two different governments.

[OldJack]

I think you all are forgetting who pays your fee. I work for my clients. I am sure that if asked the TP/Client would say (and sign) that he did not intend to hire an employee and the worker would probably sign a statement saying he was an independent contractor. Why would you let a government bureaucrat automatically reclassify without an argument. Make the government employee prove his case. Let us not forget we are professionals.

[jainen]

>>federal and state are two different governments<<

I very much agree with this. That's why you need a Virginia labor expert to fight the claim.

For example, here in California one of the formal factors is whether the worker believes he is an employee. You can see that filing for UIB might indicate that. And yet the federal status would still have to be determined separately on other factors. California law also holds that unskilled or semi-skilled labor indicates an employee relationship; Perhaps this applies to the construction work in the original post, but the IRS isn't going to use it even if Virginia does.

KC observes that states more readily take the employee position. It doesn't necessarily mean they are tougher, just that the laws are different.

[Catherine]

And in Massachusetts, whether the hire-er or work-er believe they are in an employee situation or independent contractor situation matters not a whit; state law decides. Small detail: the state has three different sets of rules. The only thing they have in common is that all are more strict than the federal rules.

[Medlin Software, Dennis]

So much more I want to write, but without more from the OP, there is no point speculating.

Is there a valid contactor license in place? If not, the person should be reported for contracting without, and the client should promise not to make the same mistake twice.

Does the client want to fight, with the understanding they may very well lose?

Does the client realize they may end up paying both the EE and ER taxes as it sounds as if the worker is less than flush? Penalties could be added as well.

Has the client considered the relatively fixed costs of change to EE, versus the open ended costs of trying to prove IC (and may lose and have to pay the EE and ER costs anyway)?

Added: My earlier post of the VA code definition of a contractor has no provision for a contractor being paid by the hour...

[OldJack]

>>If not, the person should be reported for contracting without<<

Maybe they should be reported, but it's not an accountant's job to report unless you have good liability insurance.

[jainen]

>> the state has three different sets of rules<<

Well, I didn't mention our other one, what they follow at Employment Development Department. See, their rule is that only employees can apply for Unemployment Insurance Benefits, so if you apply that proves you were an employee. Their other rule, for continuing benefits, is that you can only get UIB if you can't find a job, so if you are getting it that proves you can't find a job. We know this is reliable because workers who don't get benefits, after they run out, can always find a job right away. It's a very fair system, pretty much like a flat tax except in the other direction.

[cred65]

An analsis of the IRS 20 Factor guidelines,suggest that the below factors among others have the more heavy weighting (plagarized)::

Furnishing of Tools and Materials*: if the independent contractor has his own business, he will own his tools, equipment and expendable supplies.

Working for More Than One Firm at a Time*: Multiple customers indicates the worker owns his own business, i.e., is an independent contractor. Exclusivity indicates he is merely an employee.

Significant Investment*: What does the worker have at risk? Does he own the major equipment needed to accomplish the work? If so, he is probably an independent contractor.

Due to space limitations and the fact that I am now well endowed with Vodka, I shall return later with a more compelling documentary for the other factors that may be considered.

But go for the IC. Our professional duty is to protect our client,

[Catherine]

>> the state has three different sets of rules<<

Well, I didn't mention our other one, what they follow at Employment Development Department. See, their rule is that only employees can apply for Unemployment Insurance Benefits, so if you apply that proves you were an employee. Their other rule, for continuing benefits, is that you can only get UIB if you can't find a job, so if you are getting it that proves you can't find a job. We know this is reliable because workers who don't get benefits, after they run out, can always find a job right away. It's a very fair system, pretty much like a flat tax except in the other direction.

And yet another example of the fact that any government program will ultimately have the exact opposite effect of the one intended.

[Jack from Ohio]

If the worker is deemed an employee and granted unemployment, the amount of unemployment is based on wages.

Wages are taxable to Fed, SS, Medicare and State.

No wages paid, no liability to the TP. Wages paid to qualify for Unemployment = taxable wages on all levels.

Strangely logical...

[OldJack]

Wages paid to qualify for Unemployment = taxable wages on all levels.

Strangely logical...

Illogical. Taxable on all levels, yes, but not all subject to withholding.

If this worker was incorporated with otherwise the same facts what say you?

[jainen]

>>Wages paid to qualify for Unemployment = taxable wages on all levels.<<

Nonsense--the laws are different. Perhaps the most common example is employee contributions to a 401(k) plan, excluded from gross income but still covered by UIB and Social Security. Many fringe benefits are treated differently under the various laws. Payments to family members would not always earn your equal sign. All sorts of excluded military and government and foreign wages may qualify for UIB even if non-taxable.

And the equal sign is supposed to go both ways, but obviously there are lots of taxable wages that don't qualify for UIB. So I would say the idea is not logical at all.