Employee vs contractor

[Margaret CPA in OH]

Insurance agent client has just 'hired' someone who will focus on marketing but soon get her own insurance license and be able to write insurance. When I asked about specifics as she has had employees in the past, she said the new person would be paid on 1099 at $13 per hour then reduced to $9 per hour plus commission when fully licensed. She said she was told by a very experienced senior agent, owner of a large agency, that this was appropriate.

I expressed mild surprise and said I would like to look into this as I don't have much experience with business clients paying commissions. I am not even sure where, other than here, to begin looking for the 'correct' way to handle this. She seemed very confident, I am less so but, hey, I certainly don't know it all and you all, collectively, do. Any guidance appreciated!

[imjulier]

Margaret-

I don't think the issue is commissions being paid but more if the person will truely be an independent contractor. Refresh yourself on the rules for employee vs. independent contractor and talk to the owner. If truely a contractor, any pay would be reported on 1099 and if employee, I believe both wages and commissions are subject to employment taxes but I'm not positive on this one. My 2 cents that are probably only worth one.

Julie

[Lion EA]

If actually an employee, commissions as well as salary are part of the compensation package and the usual payroll taxes apply. It seems to me that insurance agents are their own breed when it comes to employment, so you might start by googling a trade organization for some direction.

[Margaret CPA in OH]

Thanks, Lion and Julie. I am fairly informed about employee vs contractor but not when commissions are involved and not if there are special rules with insurance agents. From the client's description, it seems the new hire (that seems already to be an employee)is under her control, uses her office and equipment, etc. However, the new person surely has a profit motive.

My beginning research in QF points to Statutory employee for a Full-Time Life Insurance Sales person for one company. So I guess when this person is licensed she will become a statutory employee. But the period prior to that, in my opinion, should be as a common law employee. The client says she was told that a 1099 for that period is proper, as if the potential employee was being evaluated.

I just want to be sure she does the right thing and gets the correct information from me, not someone else.

Thanks again.

[MAMalody]

In my opinion, she is not a statutory employee until she is licensed to sell insurance. Until then she would be a commonlaw employee subject to all the employment taxes. Review the 20 criteria, does she set her own hours, does she have to do the work,etc. Seems to me I saw a MSSP on this, you may want to check the IRS web site.

[Margaret CPA in OH]

Mike, that is the same conclusion I reached and sent to the client in an email. I asked a bunch of questions and pointed out the principal determining factors for her consideration.

I am still a bit confused about how to handle the compensation, though. How is the commission reported? Does it go on the wages line of the W-2 but only the wages are subject to employment taxes? Since a stat employee does not file SE, then does the employer, my client pay employment taxes on the commission, too?

I decided to consult my insurance agent brother to see how he has been paid/reported lo these many years. I think he will get a kick out of my asking him for tax information! I do hope someone with particular experience chimes in. I did not find a MSSP on the IRS site, but thanks for the suggestion.

[mcb39]

I have two clients who sell for Aflac. They are both treated as Independent Contractors. They are both unhappy at the end of the year when we have to file a Sch C,. however, with all the mileage they put on; as well as other out of pocket expenses, they don't make a lot of money on paper. I don't condone this system, but apparently insurance commission sales have their own set of rules and until someone protests to the IRS, they will continue to do it this way.

[kcjenkins]

The very fact that she is paying a set salary says this is an 'employee'. Yes, the commission is part of the wages, it's just a method of calculating the amount, it's still 'wages'. No difference on the W-2 at all. The benefit of being 'statutory' employee is that they get to deduct their EXPENSES on a Sch C rather than get the 2% haircut on the Sch A. The employer still pays the payroll taxes just like a commonlaw employee.

You don't even need to know how much is 'commissions', really. The only 'commissions' that you report on the employer's Sch C are commissions paid to other agents not under her employ. Everything she pays this employee will be on the Wages line.

The insurance industry was just smart enough to lobby Congress to acknowledge that in their business, their employees are commonly paid in all or mostly commissions on sales, and that the sales people have to put in a fair amount of expenses on their own, to generate those sales to earn those commissions. And thus the 2106 would be an unfair treatment. So they got Congress to allow this hybrid situation. It's the same for 'outside sales' reps, for the same reason.

[Margaret CPA in OH]

KC, are you able to provide some definitive explanation for the 'right' way to do this? And hopefully provide a cite of some kind. I wrote what I derived from my limited research in QF but here is the answer my brother, an agent for maybe 30 years, wrote:

"I bet there are as many ways to pay insurance agents/employees as there are accountants, lawyers and agency owners. Every one is always looking for a way to decrease their own tax liability.

I have worked as a 1099 independent contractor,(Country Companies, Knights of Columbus) and also received full health benefits. Those don't really go together, but somehow those companies could do that. On the one hand your were an independent contractor(when convenient for them) and on the other an employee eligible for benefits(again when convenient for them).

I have worked as a 1099 independent contractor, (Current agency) with no right or access to employee benefits.

I currently work as a salaried W2 employee with access to full benefits available from the agency. However, I do earn commissions on my personal sales which are paid to me on a quarterly basis and all applicable taxes are witheld and reported on the W2. Most other agents in this scenario would get their commissions reported on a 1099 basis. I did not want to fool around with paying estimates on taxes and the additional self employment taxes on my commissions. The accountant approved the arrangement and all is well. I know of no other agent that has this arrangement.

In almost all agencies that I know about, agents are paid on a 1099 basis as independent contractors. They do not want them to be considered employees. Direct writers for insurance companies are often treated differently as with Country Companies, Knights of Columbus and the life company you referenced. Since this individual is also going to get an hourly wage for work outside of personal sales, then the norm for an agency would be W2 on the hourly wage and 1099 on the commissions.

In closing, refer back to the opening statement."

I just don't want to be in a position of preparing this client's returns when I am not fully convinced that the person being paid is being treated correctly. I really would hate to lose this client but want to feel confident in the treatment of this situation.

Thanks so much for any assistance!

[Lion EA]

I've had some commission salesmen (not insurance) on 1099s and some on W-2s, but have never had one that received both from the same firm.

[Lion EA]

Section 3121(d)(3) From the employer's view, most reporting is like all employee reporting, except for checking the box on the W-2 for a statutory employee. From the employee's view, she gets to deduct expenses on Schedule C instead of Form 2106/Schedule A.

[mcb39]

The only Insurance "employee" I ever had who got a W2 instead of a 1099, was an Insurance Adjuster. And now, after retirement, they bilked him out of his "lifetime healthcare benefits". All of the agents I deal with receive a 1099 and file a Sch C. In some ways, this is beneficial because, for one thing, they put on a ton of miles. Some can do Office in Home, and most have many deductions. Nobody likes paying quarterly estimates or SE Tax, but that appears to be pretty much the norm with Ins salespeople. Thanks for the cite, Lion.