How would you do this?

[Roberts]

Client is joining a group of friends who will all be 1099 contract labor for a company. They are joining as a group to essentially run a little company. They'll have an office they share, computers, internet / phone, an assistant / employee they all share. They really want to buy health insurance as a group of employees. How would you do that?

 

They want to deposit their checks into the company and each would basically take a set percentage of their check as a W2 paycheck with taxes withheld. Is that feasible? How will they handle the 1099 at the end of the year? Just report it on their corporate tax return as their revenue and ignore it on their personal return? I'm afraid that's going to generate an IRS letter.

 

The company they are contracted with requires them to receive their pay in their own personal name with a 1099, they can't receive it in the name of the company they are starting. They don't expect the company to ever show a profit as if there is one in December, they'll pay everyone a bonus to wipe it out.

[Medlin Software, Dennis]

So many red flags...

Hard to follow the message, but it sounds as if the paying entity is paying the group of friends separately.  That would make then either a group of individual business owners (each with their own business), or a group of employees who are getting the shaft from their employer.

The paying entity, if hiring the group's "company" would be writing checks to the company, not to the individuals.

---

I may be blinded by the simplicity of the recent CA ruling defining employees, which is much easier than the federal 20+ questions, and which, over time, will likely "leak" to other states, but on the face of the OP, I see a huge mess I would not touch as is.

[Lee B]

Basically they are office sharing and each individual would deduct there share of the expenses on their own a Schedule C.

This is very similar to what Real Estate Agents have to do.

I don't see any way to set up a business entity in these circumstances!

[Roberts]

1 hour ago, Medlin Software said:

So many red flags...

 

They see themselves as employees to their own group. That's one of the reasons they want to flow it through their own company and operate it as an 1120 with W2 withholdings and benefits. To the company paying them - they are 100% not employees and there is no question about that. That company is legally prohibited from paying commissions to a company - they must pay to the 1099 worker directly. The regulator doesn't care if they deposit their check into a holding company.

 

When I run my own 1099s through my business I just list them on my business return as revenue. I guess we can do that and we'll have a record for the IRS. The reps will get a straight off the board 60% of revenue paid via a W2 paycheck and then they'll get a bonus at the end of the year for any remaining profits apportioned by their share of the income. That's not a tax avoidance strategy.

 

[Medlin Software, Dennis]

"see themselves".  Tough to defend unless it matches some sort of regulation :).

I have trouble seeing how a 1099 to a specific person for work done personally ("they must pay to the 1099 worker directly") can be transferred to another entity to then be converted to W2 wages.  How can it be a proper 1099 situation if the person receiving the 1099 could not have sent someone else to do the work (since it, if the entity policy is in place, would have had to issue a separate 1099 to the person sent to do the work)?

[Lee B]

22 minutes ago, Roberts said:

They see themselves as employees to their own group. That's one of the reasons they want to flow it through their own company and operate it as an 1120 with W2 withholdings and benefits. To the company paying them - they are 100% not employees and there is no question about that. That company is legally prohibited from paying commissions to a company - they must pay to the 1099 worker directly. The regulator doesn't care if they deposit their check into a holding company.

 

When I run my own 1099s through my business I just list them on my business return as revenue. I guess we can do that and we'll have a record for the IRS. The reps will get a straight off the board 60% of revenue paid via a W2 paycheck and then they'll get a bonus at the end of the year for any remaining profits apportioned by their share of the income. That's not a tax avoidance strategy.

 

This not the same as your situation. This is wishful thinking stretched to the max !

[Roberts]

36 minutes ago, cbslee said:

This not the same as your situation. This is wishful thinking stretched to the max !

How do you feel it is different? Other than they are generating a W2 for themselves and paying payroll taxes that way.

[Lion EA]

There have been some court cases on S-corp shareholders trying to "assign" their personal IC income to their wholly-owned corps. Mostly losing. But a particular combination of contract between shareholder and corp has worked for certain circumstances. Search for court cases with your set of facts to see if there's a way to make it work. It will involve a lot of contracts, operating agreements, etc., if it's possible.

[Lee B]

1 hour ago, Roberts said:

How do you feel it is different? Other than they are generating a W2 for themselves and paying payroll taxes that way.

I am very curious as to how checks paid to individuals  and 1099 income reported to the IRS in Box 7  with the matching SSN numbers of the same individuals

is reported as Corporate Revenue. What would be the logical justification ?

Frankly, my creative imagination doesn't stretch that far.

[Roberts]

16 hours ago, Lion EA said:

There have been some court cases on S-corp shareholders trying to "assign" their personal IC income to their wholly-owned corps. Mostly losing. But a particular combination of contract between shareholder and corp has worked for certain circumstances. Search for court cases with your set of facts to see if there's a way to make it work. It will involve a lot of contracts, operating agreements, etc., if it's possible.

An S-corp though is a tax avoidance strategy so I could completely see that being a problem. Being paid $75k as a consultant and then declaring via the S-corp you really only were paid $25k and you avoid a bunch of SS and MEDA payments. That's not an issue here.

[Lion EA]

But the "assignment" of income earned by individuals and reported in their SSNs is an issue.

No matter where the checks are deposited, how can they avoid reporting Forms 1099-MISC in their own SSNs on their own Forms 1040 Schedules C or other appropriate schedules?

I guess they could then pay an administrative company to provide them administrative services, such as office space, a receptionist, office equipment, phone answering, etc. But, they might be shareholders but would not be providing services to that administrative company so wouldn't be employees or receive Forms W-2, right?

Have they worked with a lawyer in their state to form the corporation, write up an operating agreement, etc.? They need to have you and their lawyer and their banker and any other advisors work together with the shareholders.

[Pacun]

I would suggest to them to form a corporation for the future. Then have the clients pay the corporation and they can get guarantee payments. For the current year, I would report them on Schedule C and share the expenses.

I agree with Lion.

[Medlin Software, Dennis]

1 minute ago, Pacun said:

I would suggest to them to form a corporation for the future. Then have the clients pay the corporation and they can get guarantee payments. For the current year, I would report them on Schedule C and share the expenses.

I agree with Lion.

From the OP: "The company they are contracted with requires them to receive their pay in their own personal name with a 1099, they can't receive it in the name of the company they are starting."

This is a common red flag that the person doing the work is really an employee, but to take the job, they capitulate to the employer's policy.  If the entity receiving the 1099 must be a particular person, then it is an employee/employer relationship since the "employee" cannot send someone else to perform the task, and cannot be in business for themselves (since it must be reported to a particular person, not the person's business).  As provided in the OP, nothing more than a scam to avoid WC, matching taxes, benefits, etc.

Think Uber, DoorDash, FedEx, etc.  DD is one I am slightly familiar with based on reading their documents.  DD has verbiage making it appear the dasher can hire out the deliveries to others, but it is not really practical, since DD actually has verbiage which would limit the dasher's selection of employee's or subs.

[DANRVAN]

Unless they can get a contract between the paying company and the corporation, they are out of luck.

Case law is very clear when it comes to assignment of income to corporations.

First of all, there must be a contract between the corporation and the payer.

Secondly, there must be an employment contract which recognizes the corporation's controlling position.

[Roberts]

12 hours ago, DANRVAN said:

Unless they can get a contract between the paying company and the corporation, they are out of luck.

Case law is very clear when it comes to assignment of income to corporations.

First of all, there must be a contract between the corporation and the payer.

Secondly, there must be an employment contract which recognizes the corporation's controlling position.

I know that's the case for an S-corp, are you 100% sure that's the case for a C-corp? Those are two very different tax situations with obvious strategy differences. I'd also see a problem if the profits were attempted to be distributed as a dividend instead of W2 income.

[Lion EA]

Have you found any court cases with facts similar to yours that allowed individuals being paid as individuals and receiving forms 1099-MISC as individuals to assign their checks to a partially owned C-corporation and receive wages from the C-corp based on a percentage of their individual IC income? As you explained, they do NOT work for the C-corp but work as ICs for a mutual client.

[DANRVAN]

8 hours ago, Roberts said:

, are you 100% sure that's the case for a C-corp?

It doesn't matter if a S or C corp, assignment of income still applies.

Also,  it does not matter what the motive is.  The income is reported by the person / entity that was legally entitled to it.

Unfortunately there does not appear to be a solution for your client's situation.

Here is a quote from Johnson v. Commissioner, supra at 891, that addresses your questions:

An examination of the case law from Lucas v. Earl hence reveals two necessary elements before the corporation, rather than its service-performer employee, may be considered the controller of the income.15 First, the service-performer employee must be just that—an employee of the corporation whom the corporation has the right to direct or control in some meaningful sense. See Vnuk v. Commissioner, 621 F.2d 1318, 1320-1321 (8th Cir. 1980), affg. a Memorandum Opinion of this Court; Vercio v. Commissioner, supra. Second, there must exist between the corporation and the person or entity using the services a contract or similar indicium recognizing the corporation's controlling position. See Pacella v. Commissioner, 78 T.C. 604 (1982); Keller v. Commissioner, 77 T.C. 1014, appeal filed (10th Cir., Apr. 2, 1982).16