W2 vs. 1099

[jasdlm]

I do the payroll for an employer who has about 10 employees. He gave bonus checks at the end of the year which he did not run through the payroll system. I advised him not to do this. He said that the employees understood that they would be responsible for the FICA but wanted to get the bonus checks paid this way (I know . . . really stupid). I W2'd for all income that was put through payroll (and reported on 941s) and 1099'd for the bonus checks.

I got an email today from on of the employees saying he had been advised that since he was an employee of CAL, he should contact me and request that his W2 be redone to reflect the 1099 income.

My question: Assuming the employer was responding to employees' requests to pay bonuses this way (I just figured they wanted the money in the short-term . . . kind of like credit), did I screw up? Can you issue a 1099 to an employee? I used to work for someone who paid me a 'salary' and 'commission' and issued a W2 for one and a 1099 for the other. However, I don't know that you can treat a 'bonus' like a commission.

I'm sure the employee who emailed me was give directions from his preparer (I don't know who the preparer is).

I knew this would come back to bite me . . . and I didn't even do it!

Thoughts?

Thanks.

[grandmabee]

Bonus go on W-2's You shouldn't let your client talk you into doing 1099's.

I would correct w-2 and on next paycheck subtract the fica that the employee owes. which means you also have to correct 941, state, all reports. But hopefully it happened in only one quarter.

[BulldogTom]

What state are you in jasdlm?

I would tell my client the same thing. Get a corrected W2, you are an employee. But I would also warn him of the potential consequences of this action (see below).

Everything that an employer pays and employee is wages unless you can find a code section that says it isn't. I don't know of a code section that exempts bonuses. They should have gone on the W2. I would advise that all employees get a revised W2, that you gross up their wages for the "net check" that they actually recieved, and pay the penalty and interest. I beleive this is what the IRS would tell you to do.

Now, that being said, if you are in a state that has "at will" employment, you could just fix the one employee W2, hope it does not trigger an audit, and then very publicly have your client lay off the employee "for no reason, per our employment relationship agreement". The rest of the employees might get the hint. Then again, they may not. This is a very risky thing to do. Then go tell your client to never ever listen to the employees again and always cut a payroll check for bonuses.

Tom

Lodi, CA

[JohnH]

How employess can shoot themselves in the foot reminds me of a situation with a client of mine a few years back. He handed out bonus checks at Christmas time (with all taxes withheld), and one employee erupted "Can't you do anything about these taxes?!" (Not word of thanks or appreciation for what he did get, just criticism over the taxes which were beyond my client's control). My client replied that he would look into it the next time bonuses were paid.

A few months later the client handed out bonus checks due to some business goals having been met, but the employee in question didn't get one. He finally got up the nerve to ask and my client told him he wanted to be sure the taxes didn't upset him, so he just didn't pay this guy a bonus. The point having been made, and this client being a nice guy at heart, the employee was later given a bonus check, but I'm pleased to say there haven't been any more complaints about the taxes.

[jasdlm]

I talked with the Employer, and he just wants to talk with the employee. He maintains that the employees asked to receive the money this way, and that he (employer) explained the consequences. He says they grossed up the bonuses to take into account the tax liability, etc., but of course, he has no proof of this as any bonus is discretionary. (These were generous bonuses.)

I do live in an employment at will State. Basically, my client feels that he tried to do what the employees wanted (this employee and one other were the ones who specifically wanted to be paid this way) and feels that if the employee wants to make a fuss, he'll amend, etc., but won't be as generous with future bonuses which, I guarantee you, will run through payroll.

I feel sick to my stomach. BColleen is right. I shouldn't have done this. I don't think I was forceful enough when I told my client he should run the bonuses through payroll. I told him the consequences to the employees, etc., but I didn't say 'you're violating the law'." I feel like this is going to end up causing big trouble. This employer is a really great guy who pays employees very well.

On top of it all, I live in a small town, and I'm sure the employee's preparer is thinking I'm an incompetent idiot.

***Sigh*** I was on a roll until this email. Now I can't think about anything else. Thanks for letting me rant.

[TAXBILLY]

Don't bear the burden of all this on yourself. The employer is ultimately responsible for this mess. Be sure you document everything that happened for future reference.

taxbilly

[Terry D EA]

I might add one thing to Tom's post. The penalties and interst should be picked up by the employer for failing to properly withold the required employment taxes. Don't forget, the employer owes his portion of the FICA as well. Make sure you cross all of your T's and dot all of the I's when making the corrections. The IRS can screw this up and cause you more headaches (Just settled one for 1st qtr 06). Be sure to get your fee (substantial) for all of the corrections.

Terry D.

[michaelmars]

how muchwere these bonuses anyway. i know not technically correct but if they were small the irs will not care if they were on 1099. at least in my experience i never had it questioned [i know they could always pick up on it] i wouldn't lose any sleep over this, you advised the client, then followed his direction. in fact if you do have to fix this at this timeof year you should 2x your normal rates.

[lbbwest]

how muchwere these bonuses anyway. i know not technically correct but if they were small the irs will not care if they were on 1099. at least in my experience i never had it questioned [i know they could always pick up on it] i wouldn't lose any sleep over this, you advised the client, then followed his direction. in fact if you do have to fix this at this timeof year you should 2x your normal rates.

To clarify what michaelmars posted the IRS NEVER "cares." It's a humongous machine of computers. 1099s would fly through the system even if they were for MORE money than the W2s for the same employees. Human beings don't "look" at the papers. What has happened in this case is a savvy preparer correctly noted to the client an employee can not receive a 1099 and W2 from the same employer. If the savvy preparer files an SS8 the employer is sunk. The ONLY time the IRS enquires into anything is in a random audit (Very very very very rare) or someone "drops a dime." (Also rare.)

That's why so many preparers can give faulty and illegal advise to others with the satisfied statement "I've never had a problem."

Because none of us "have a problem" with anything we do, as long as the computer information is appropriately matched up, ..... until we get caught.

Fortunately there are preparers so incompetent that they don't have the knowledge to even match up the documentation appropriately.

To my knowledge there is no acceptable dollar level of fraud, I was not aware there was a materiality component to tax law. lbb

[jasdlm]

Thanks to all for your advice and support. The W2c's are completed and being delivered to employees this afternoon along with corrected 1099s showing 0 box 7 income. I have amended the 941 and the W3. Still have to do State and Federal unemployment return amendments, but that shouldn't take long.

I gave a very long explanation to my client along with my recommendation. The client took the recommendation immediately and thanked me for my attention to the issue.

Whew. Glad that's over.

[michaelmars]

first what i ment was lots of things aren't technically correct but in the end the irs gets the same taxes and if the amount is demiimus then you can show it wasn't done to defraud the government and just a client confused by the proccess, again not the right thing to do but not worth jasdim losing sleep over. as for the irs not caring again what i meant was that the computers will not match the soc sec of an employee getting both a 1099 and w-2 from the same company, there are many legitimate times this might occur. lbbwest is correct in all that he said, i was just trying to tell jasdim that in the relm of things this is not a very biggie.

just a side note, if any of the other employees already paid to have their returns done, is the employer going to reimburse for the amending fees?

[jasdlm]

Thanks, Michaelmars. I took your first post exactly the way you explained it in the 2nd post. It is very nice to have moral support, and I was definitely losing sleep.

Thanks again for taking time to post. I think lbb read your post the same way but was just clarifying.

I have thought about the reimbursement for preparers to amend. I guess I'll cross that bridge when I come to it.

Thanks again to all of you. I have definitely learned a lesson.

[Catherine]

There are also _legitimate_ reasons to get a 1099 and a W-2 from the same employer.

A contract worker is hired for a specific task and is a great fit; the company then offers this person a regular job. First year gets both.

A regular worker at a company has a sideline self-employment job in a different field. Said worker provides - outside the regular job - services to the employer (as well as others) from the self-employment (say, office manager at a club who is also an artist is paid to paint a mural over a weekend or two). Compensation over $600 => 1099 as well.

And more, I'm sure. But just to "get around" withholding etc doesn't wash, as stated above.

Catherine