1099 Misc - Missclassification

[Terry D EA]

Client presented a form 1099 MISC showing a substantial amount 20k+ in box 7 that was hand written. After lengthy discussions with the client (a good client for the last 10 years) it is clear to me the client was indeed an employee and not a subcontractor. The client revealed the amounts received were paid based on an hourly rate working 8 hours per day. After hearing this, no additional discussion needed to determine the client is an employee. My recommendations are for the client to complete form SS-8 along with form 8919 and report the income on line 21 as other income. If this income is put on Sch C, QBI is generated, no allowable expenses, need business code; etc. The client performs HVAC services for an individual who claims he sub-contracts for another company and is not in the business of doing so for a profit and there is no profit motive. The individual is listed with the NC SOS as a legitimate LLC started in 2018. My client is not in the business of performing HVAC installations and repairs. Therefore he is not running a business as identified in sec 162.

Now for the real kicker. From this point forward the individual is the "Employer". The employer, deducts a paperwork fee of 4% and the amount in box 7 of the 1099 MISC is the total amount including the so called paperwork fee. Another co-worker has stated that heir preparer claimed the paperwork deduction, mileage and other business related expenses. I told my client they are being ripped off by this guy. I showed them the benefit of the employer to do so. Now, this client is one of a family of clients that I prepare taxes for and I don't want to take the risk of loosing the whole family. However, I told the client I could NOT in good faith and conscience complete this return in any other manner. It would be unethical and I would suffer dearly. 

I'm open for opinions, would any one handle this any differently?????  Yes, I told my client what the consequences of completing the SS-8 and 8919. Not sure they are 100% on board yet.

[grandmabee]

You will have to fill out the form to pay his half of the SS as if it was withheld.

[Terry D EA]

Correct, and if I remember correctly that is done with the 8919.

 

[Possi]

It may not be right, but I would put it on the Sch C and take any documented, legitimate deductions he has. 

The only tax he's paying that his "employer" isn't is 7.65%. It is painful because all the tax is due all at once. 

If he and the boss knew from the start that this was how it would shake out, and he was collecting 100% of his hourly rate, he probably knew he was being paid as a contractor. 

If you "call out" the employer on this by filing these forms,  your friend might suffer some consequences at work. If he were already separated from that gig, do it, no issue. But not if he's still wanting to work for this company. 

It's the whole family you are concerned with, too. Not just this client. That's another reason I say Sch C, legit expenses, explain that it's not so bad, and be done. Even if there are no expenses, Sch C and be done. 

He will know it's done right and he will somehow pay it off. It is what it is. 

That's what I'd do, right, wrong, good, bad, or ugly. 

https://www.irs.gov/compliance/criminal-investigation/employer-and-employee-responsibilities-employment-tax-enforcement

[Patrick Michael]

I have a similar client.  A national replacement window manufacturer subcontracts the installation and the my client "works" for the sub.  The sub tells him when and where to show up, provides all the materials and tools, and supervises the job.  The sub told the client that since he (client) gets paid by the job (not hourly) and he does not have a regular schedule (sub will call a couple of days before the job and client can decline to work) he (client) is not an employee.  Client does not have expenses to offset the income.  Client enjoys the work and flexible schedule so he does not want to rock the boat .  I file the Sch C and doesn't mind paying the SE tax.  

I explain to him every year that this sounds like this could be an employer/employee relationship, what his options are, and document the discussion. I believe I have done my due diligence in explaining it to the client and it's then up to the IRS and/or client to determine the relationship.

[Gail in Virginia]

Life is full of trade-offs.  Yes, they have to pay both halves of the SS and Medicare, and they are probably not covered for unemployment.  On the other hand, they are probably paid a higher rate per hour than they would be if the employer had to provide benefits.  If everybody is happy with the arrangement, who am I to rock the boat?  I am bothered when whoever hired them doesn't explain this from the beginning but as long as everyone understands the rules of the game, I think it is reasonable even if not technically correct.

[Terry D EA]

My main concern as I stated in the OP.

No legitimate expenses. Doesn't have proof of anything.

How do you justify QBI deduction when it is not a qualified business. No profit motive or anything else to prove it is a business. I am contacting Drake to see if there is a way to turn off the QBI on schedule C. As of this moment, I haven't found the check box if there is any.

This guy asked his employer repeatedly about withholding the taxes so he knew something wasn't right. Yes, I'll approach him with the consequences of filling out the forms. He stated that this venture wasn't working very well for him. No benefits, no withholdings, and he feels the gross pay reported on the 1099 is wrong. It is his fault if he didn't keep the pay stubs or copies of the checks. He has done so this year cause he smells the rat. 

To me, and I may be wrong, but filing the Sch C is wrong.

[Lion EA]

It might not be what was supposed to happen, but it is what happened. We report the past and help our clients plan for the future. It is the client's decision to accept what's reported or not. And, you can decide to keep him as a client, or not. By the way, would an IRA help him -- paying himself for his own retirement to pay the government less?

[Lion EA]

Your client DOES have a profit motive for working. He accepted the checks. It's not a hobby. You said eight hours per day. And, he is in the business of HVAC services. (The business of being an employee would not be QBI.) Didn't he deposit his checks, so he can confirm his annual amount on his bank statements? Lay it all out for him, including whether you are willing to prepare his return under which conditions. Let him decide. He might be ready to blow it all up. Although, I'd recommend he find another job first and THEN file his returns. He can always extend and pay something with his extension.

In my software, I have to chose "Qualified" or "Specified Service" or the income is not counted as QBI.

[Yardley CPA]

50 minutes ago, Terry D said:

My main concern as I stated in the OP.

No legitimate expenses. Doesn't have proof of anything.

How do you justify QBI deduction when it is not a qualified business. No profit motive or anything else to prove it is a business. I am contacting Drake to see if there is a way to turn off the QBI on schedule C. As of this moment, I haven't found the check box if there is any.

This guy asked his employer repeatedly about withholding the taxes so he knew something wasn't right. Yes, I'll approach him with the consequences of filling out the forms. He stated that this venture wasn't working very well for him. No benefits, no withholdings, and he feels the gross pay reported on the 1099 is wrong. It is his fault if he didn't keep the pay stubs or copies of the checks. He has done so this year cause he smells the rat. 

To me, and I may be wrong, but filing the Sch C is wrong.

I didn't think you had to take QBI.  If you don't check the QBI eligible box, is QBI still calculated? 

[DANRVAN]

3 hours ago, Patrick Michael said:

I believe I have done my due diligence in explaining it to the client and it's then up to the IRS and/or client to determine the relationship.

I agree, you nailed it!