SALESMAN ALLOWANCE

[DEO]

I have a question regarding salesmen car allowances at my regular job.

In addition to the salesmen salary, they are paid an allowance for the use of their car. i.e. insurance, wear & tear, repairs etc.

In the past years, they were given a 1099MISC with the amount in Box 7, non- employee compensation

Is Box 7 correct or should it be classified as Box 3-other income or ??????

 

All other expenses were accounted and paid for, with no 1099 issued, e.g. gas, tolls.

Your comments are greatly appreciated

 

Deo.

[Lynn EA USTCP in Louisiana]

It should be included as W2 wages, with all the pertinent withholdings.  1099-MISC treatment is (and always has been) incorrect.

[Max W]

The problem with these cases is that they have to be dealt with as they are, not what they should be. 

Since the client receives direct expenses, the use of the car would be for depreciation.  The depreciation rate is 22cents/m. and can be taken on SCH C or C-EZ.

The client could talk to the employer or file an SS-8, but that could cause friction with the employer and become counterproductive 

[Abby Normal]

We have that exact situation and we add the allowance to box 1 of the W2. Plus we also add the gas reimbursements to box 1 of the W2 because we do not know if it is more or less than the standard mileage amount because the employees are not accounting for mileage to the employer. This leaves the employee to report their mileage on the 2106 and subtract the amount of reimbursements the employer paid for gas and allowance.

http://www.irs.gov/instructions/i2106/ch02.html#d0e429

We've tried for years to get them to just report their mileage and get reimbursed a set amount per mile, but we can't get them to switch, even though we tell them it would save both the employer and the employees taxes. Their reason: this is the way it's always been done.

[Jack from Ohio]

. Their reason: this is the way it's always been done.

The demise of our country!!

[Medlin Software, Dennis]

Keep a CYA note so you can show your solution for something the employee cannot fix.

For me, the most common I get is when an owner/employee does not pay themselves a reasonable wage on a frequency meeting their state requirements, and those who simply do not meet their state requirements for any employee (pay frequency, pay stub, etc.).  In most cases, changing to be compliant is cheaper than what is currently being done, and is absolutely cheaper than defending the position and the penalty payments.

I was just asking my kids how their employers handled the CA Sick Leave notification.  One was handled properly - not subject because his current gig is an exempt gig (entertainment industry).  One is handled properly on his stub, but has not received the required written notice showing the employer's policy (can be inferred it is the state minimum).  One of the girlfriends has received no sick leave on her stub, and no notice.  For the two non-compliant employers, I told the kids to wait it out for a bit since neither is in a position to safely rock the boat.  Showed them how to track themselves.

[SaraEA]

This complex scenario brings up a scary thought I had today--the IRS is so underfunded right now that none of this is going to get audited (unless for some reason it comes under the automated underreporter system).  I know, many argue that they were wasting too much money anyway on expensive retreats and nonproductive employee bonuses, but I believe those days are over.  They now have a lot less money to spend (in absolute dollars) than they did just a few years ago, a lot less employees (including at CI, the ones who bring in the big bucks), and customer and tax pro service is minimal.  Even ID theft victims only got through on the phone 10% of the time this season.

We professionals work hard to keep our clients in compliance.  We insist they have records on everything from mileage to charitable contribs to day care to rental income and expenses.  Let's not forget some reasonable basis determination of stocks, partnership interests, inherited property. Today I was working on a return for a brother and sister who jointly own a brokerage account that is reported in the brother's SS number.  We put half on hers, but she told me every year her brother gets an IRS letter from the AUR. He puts together an explanation and that's the end of it.  He does not issue her any 1099-int or -div statements, and I don't know how he could issue her a 1099B for the stock sales.  Some of the years in question she did not report her half on her return, so it's not like the auditor checked out his story.  It made me think that the IRS can no longer do the job it is mandated to do--collect tax revenues and fairly administer the tax laws.

So why do we try so hard to keep our clients in compliance?  The chances of Deo's return, or my sibling returns, being audited are nil. The computers won't notice that Deo reported more W2 income than they know about. The 2106 expenses likely won't be enough to trigger a DIF audit, and even if they are it will likely be bypassed for bigger buck returns.  My client's brother will go on forever reporting half the brokerage account income and explaining it away to the computer, the IRS just trusting that a response--any response--is good enough. PS.  I am recommending they form a partnership, title the account with the EIN, and let the partnership do the accounting and pass thru the results.  Today I was wondering why since they seem to be getting away with their rudimentary reporting. In the same vein, Deo will spend a lot of time trying to get the client's expenses and reimbursements just right, which is what we tax pros do. If the IRS is no longer strong enough to care, it's tempting to wonder if we should.

[Abby Normal]

I hear what you're saying, Sara, but I've seen a upswing in IRS audits the past few years. They're all correspondence audits over either Sch C or Sch A. I'm currently awaiting resolution of two audits. Prior to the past few years, I only had two audits over a twenty year period.