Who Issues 1099?

[Corduroy Frog]

Small corporation, a C-corp, 100% owned, enacts a hiring freeze, and during timeframe announces it will not hire any employees, no matter what.

Receptionist quits. Owner hires new receptionist, but tells her he can't put her on payroll. So he pays her by check out of his own bank account. During the freeze, he pays her $3500, with no taxes withheld.

Hiring freeze is over. New receptionist is put on payroll, and taxes withheld properly for the rest of the year.

His accountant has the good sense to warn him that he does not have a personal for-profit activity to accommodate a deduction for $3500. Only business he is involved in is his C-corp. So to not lose this $3500 deduction, he writes an invoice to the C-corp, and is reimbursed $3500 for his expense.

All of this to pose the question. Who, if anyone issues the 1099 to the receptionist?
A 1099 has to be for a business purpose, and the owner did not have a business purpose and can't deduct the money. The corporation did not pay her, hence no requirement to issue a 1099.

Does the girl not get a 1099 at all?

Please, for purposes of this question, do not address the employee-versus-independent-contractor issue. I am aware she should have been an employee.

[erchess]

Economic Reality

She worked for his corporation. That is the Economic Reality. The corporation is responsible for the tax reporting. It should issue the 1099. It may deduct the expense.

[JohnH]

I agree with erchess. One could take the view that the economic reality is that he simply loaned the corp the $3500 to pay the independent contractor while she was performing services for the corp, and then the corp repaid the loan when it wrote him the reimbursement check. Under those circumstances, the corp deducts the payment as "Purchased Services", "Contract Labor", etc, and the corp issues the 1099 to her. I wouldn't have any problems handling that way for a client on a one-time basis.

[JON]

It is salary

to the corporation and should be withholding on it. "Salary Freeze" does not change what type of expense its. He loaned the money to the corp and the corp pays him back for the slary advances. He needs help.

[ChEAr$]

My take on this

to the corporation and should be withholding on it. "Salary Freeze" does not change what type of expense its. He loaned the money to the corp and the corp pays him back for the slary advances. He needs help.

I hate to disagree with two esteemed colleagues, erchess and JohnH, but here is a 100%
corporate owner who enacted a so called hiring freeze all by himself and then thought better of it. The economic reality with which IRS would agree I feel sure, is that she was still a
corporate employee during that "sub contracting period", and some corrections need to be
done with back FICA, SUTA and FUTA taxes paid.

So then, Jon, I'm with you.

[Burke]

I agree with Chears.

[erchess]

OP asked us not

to address the employed vs independent contractor issue. Snags I believe knows more than I do about the pitfalls of that situation.

In fairness to both snags and his client it is a common if not "according to Hoyle" practice for small businesses to start new hires as contractors and after a certain time either discharge them or make them employees.

[Snaggletooth]

Thanks

...for the support Erchess.

The respondants to the original post were put in a position to decide between choices that were all incorrect, because of the employee issue, so they spoke their mind.

The more I think about the 1099 situation, if employee treatment were not available, the more I also think a 1099-MISC be issued to the owner on a nominee basis.

All of know the referenced situation cries out for treatment as an employee, but sometimes we are drawn in at the end of the year after W-2s and 1099s have already been issued to file corporate returns only.

[JohnH]

Of course, you could ignore the 1099 issue altogether and just take the tax deduction as "Purchased Services". Failure to issue the 1099 might cause a $50 penalty to be assessed at some time in the future (although that's very unlikely), but it wouldn't have anything to do with whether or not the deduction can be taken. I see those as two entirely separate issues.

[thomtax]

to address the employed vs independent contractor issue. Snags I believe knows more than I do about the pitfalls of that situation.

In fairness to both snags and his client it is a common if not "according to Hoyle" practice for small businesses to start new hires as contractors and after a certain time either discharge them or make them employees.

Your comments still keep discussing employee vs. contractor. He specifically stated in the original post that he did not want to get into this discussion and requested advice on his question.

LT

[Lion]

Payor

To get back to the original question: Just because an individual not in a trade or business is not required to issue a Form 1099 to someone they pay, does it mean they cannot? Why can't the one who paid the receptionist issue a Form 1099? And further, why does ANYone have to issue a 1099? If you don't trust the receptionist to report her worldwide income without someone tattling to the IRS to maker her, then you shouldn't trust her to represent your business at the front desk!