Misclassified IC

[Gretel]

Which form do I use to report wage income to have TP pay his share of SS/Med.? TP was misclassified as IC and fought with POA of employer (old woman who died) already last year. Is it form 4137 or another one?

Thanks.

[Bees Knees]

TTB, page 5-24, "Wrong Treatment of Employees as Independent Contractors" gives you the details. Its Form 4137.

[S T]

IC vs Employee

Perfect timing on this post. Met with a client who worked for a company that paid him in cash, no taxes withheld, Employer stated the employee was an IC. Employee has filed a complaint with the Labor Board as the employer did not pay him all the monies that were due him, he has time cards and other records. No 1099 issued nor W-2 issued.

So question is how to file for his income tax return. Report the income as if he received a 1099 form, then follow the procedure on TB 5-24 for form 4137. Do we have to file SS-8 form? Will we be able to efile return?

Sandy

[Snaggletooth]

Line 7 option

Sandy, if he had no significant expenses that would easily accommodate a Schedule C and the dreaded SE, I would report his income on Line 7, Salaries and Wages.

A few years ago when IRS was ga-ga about employee treatment for everyone, they issued instructions to people such as your client. The idea was the taxpayer would claim to be an employee, and the government would then chase down the evil employer and wreak all manner of penance on the payer. There was a presupposition that all payers were employers and all payees were employees.

I did this for a few guys, occasionally with a 4137. These were people that were horrified at the thought of paying both ends of SS and Medicare. The REAL WORLD is as follows: IRS didn't chase down ANYONE that I know of as a result of the "employees" reporting this on Line 7, even with a 4137. All of the hassling was done to the party reporting, as they wanted the taxpayer to essentially seal a case and deliver the evil "employer" to them on a silver platter. But my customers DID avoid both ends of SS and Medicare.

Also, real world is overwhelmingly revealing the truth about most of these arrangements. Typically, the payer would approach the worker about just paying straight cash or check with no withholding. The payee would deliriously find this arrangement irresistable and agree to this dream world of compensation without taxes. Then when he gets stuck with a 1099 at year-end, and has to file taxes along with SE, then suddenly the payer becomes the villain and the root of all headaches.

[JG EA]

Report - which way?

Form 4852 Substitute W-2 would work if the employee was an employee. Then logically filing the 4137 would be the correct way to pay his half of SS and Med.

But if he started out the job knowing he was an IC then wouldn't he have to be on C and pay both halves?

If the employer is still around, perhaps the SS8 would work, but I would be inclined (if he no longer works for the company) to just have the client report and pay from his point of view, and realize more information may be requested from him. If he has a complaint in with the Labor Board, then steps are already being taken to get the employer to report as an employer.

I don't know if you can efile a form 4852.

[Bill Tubbs]

E-file 4852

I don't know if you can efile a form 4852.

Yep. I did a couple years ago. In my software, I had to enter everything on the 4852, then re-enter it all on the W-2 screen (the software didn't automatically include the 4852 in the W-2 calculations.

Bill

[S T]

My client is a definite Employee

I have known this client for years, works for cabinet makers. No doubt in my mind that he thought he was being hired as an employee, has never had an IC position. Employer just doesn't want to pay the payroll taxes and work comp.

Employee had to clock in and out just like any employee. Taxpayer has copies of the time cards. When the employer was confronted with the "no withholdings", the employee was basically terminated. Thereby the Labor Board Hearing, plus some unpaid wages.

I thought about the 4852 sub W-2, but I have nothing to put on it except the wages, (At this time we do not even have a EIN or State Employer #, only the name, address and phone #) no payroll withholdings, etc. I definitely do not want to do a Sched C, so other option would be the 1099 type reporting without any documents, then the 4137 to tax the client for his portion of the FICA and Mcare.

Do you suppose the return can be efiled with notes?

I can almost guarantee that this Employer will not show up at the Labor Board Hearing.

Sandy

[Snaggletooth]

Blatant

Sandy, this is even more blatant than usual. The employer will not show up at the Labor Board hearing, and the employee will be upheld. From my previous experience (see my post above), you can look forward to the following:

1) Nothing will happen to the employer. The most that will happen is that he will move his cabinet shop to another part of the state, or, in the case of California, maybe to ANOTHER state where he has less to put with.
2) The IRS will be more interested in collecting your client's employee share of social security from the 4137 than in enforcing the law on the cabinet-maker, even though there might be as many as a dozen employees in the same situation as your client. The collection people at IRS (or anywhere else) goes after the low-hanging fruit before climbing the rest of the tree. This is true even though the IRS has the power to essentially dictate terms and conditions without having to go through the courts.

I would love to see some of these "employers" follow the laws and regulations. In my part of the country as elsewhere, no one wants to start a payroll or be accountable for anything. I know this makes life easier for them, but this just becomes another assimilation into the underground economy - a haven for payers and payees alike.

[Gretel]

Real life

Thanks for all that came about my post. My client is an employee and was promised by employer (now dead) and her POA to get W-2. Per Ron, nothing will happen to employer, so we just can file form 4137 and be over with.

I am so glad about all "real-life" comments. Ron, aren't you sometimes fed up with real life in context with tax law? You seem to have a lot of experience in this.

You are almost tempted to advise clients who want to start a business to go by real life (or what the IRS doesn't enforce) instead of going by the rules to help them over the start up phase. Just kidding.

[S T]

Calif

Snags,
I have to say that Calif is VERY aggressive on their collection of uncollected payroll tax, so I think I will contact the EDD and find out how to obtain info. Actually I think that IRS lets the States do this portion of their work.

I have been to enough Labor Board Hearings and EDD hearings, to know that in due time, this employer will have a visit from the State of California.

I am just trying to report my clients wages correctly so that he is not penalized unnecessarily. And the client wants to make sure that he is credited with the right amount for his earnings and FICA/Mcare.

Sandy

PS Your thoughts, report on line 21 with form 4137 to pickup the employee's portion of the FICA/Mcare??

[Snaggletooth]

Line 7

Sandy, I would use line 7 "Wages" because this is what it really is, and also because it establishes "earned income" whereas line 21 does not. This may or may not have other implications for your client.

The place to add the employee's portion of SS and Medicare appears to be line 59. Designed for unreported tip income by waitresses, but perfectly appropriate for any 4137 situation.

Best wishes - Snag

[S T]

Wages for not reported

If I use line 7, I won't be able to efile, as I do not have an employer ID# unless Calif will provide it to me, and I can't do a sub W-2 either on 4852.

Any ideas on how to find out the EIN #?

Probably a paper file, then you say to report on line 7 and do the 4137 to have the taxpayer pay the FICA and Mcare.

This one is a round-robin leading me in circles.

And it is only 2/10/06!

Sandy