sub contractor to employee - assets

[oceanlovin'ea]

I have a new client that I am working on 2009 and 2010 returns. He filed the returns but had been given 1099 misc by a company that he didn't report.
He has expenses for both years for me to use.
In 2009 he went to work for a company driving a wrecker truck. He received a W-2 from them AND a 1099 Misc. He said he didn't get the 1099 and only reported the W-2 income. Now we have to take care of the 1099. I believe the company paid him as a sub contractor for first 3 or 4 months and then put him on payroll since he lasted past trial period. But when he first went to work for them he had to buy equipment to put on the truck to do the job. I think because of the cost of most of the items I will have to depreciate them. My thinking is that I will not section 179 any of them but take the depreciation for the year.
He finished out the year as an employee and the beginning of 2010 he was an employee for this company. Then he left and went to work for another company where he again was a subcontractor.
The equipment that he first bought has been used in his occupation as a wrecker truck driver all along but sometimes as an employee and sometimes as a sub contractor.

Any suggestions on how to write off his expenses and divide between employee and schedule C????

Thanks
Linda EA

[JohnH]

I'd probably allocate depreciable items based on time spent in each status, rather than based on the relative amounts earned. If there were any direct expenses, then they must go to the activity for which they were incurred.

Depending upon how this all plays out, you could find yourself in a situation where the 2% haircut cheats him out of employee business expenses because the net Schedule C income figures into the 2%, but I don't know of a way around that little inequity.

[Golden Rocket]

Truck Depreciation

I would take the entirety of truck depreciation against his Schedule C. The argument is that "depreciation" is nominally ascribed to an operational expense for wear and tear, but the real impact behind the IRC statutes is instead "Recovery" of investment as opposed to an operational cost. I would not sacrifice any more deduction than I had to on the IRS altar of the 2% disallowance.

There is a bigger issue, namely "Is he an independent contractor or an employee?" Regardless of any case that could be made for either position, the payer made a critical mistake by issuing a W-2 and a 1099 in the same year. Invites an auditor right to their door, and the door of your client as well.

[JohnH]

I like that line of reasoning.

[oceanlovin'ea]

I don't think he owns the truck. But he had to buy the equipment to use on the truck such as tail light tow, lock-kit, straps and rachets, jack and air tank. He also purchased a laptop that he only uses in the truck and a GPS. When he leaves a job, he takes his equipment with him.

I am considering the employee option too. I will do whichever will make him owe the least amount of money. He will owe less money if I do the schedule C.
I depreciated the items over $100 that he bought. I didn't do section 179. I then adjusted the depreciation so that I only took depreciation for the time he was a subcontractor.

The next year, 2010, he worked as a subcontractor for another company and I can take depreciation for the period of time he worked for them in that year.

Is that the way you would handle it?


Linda, EA

[JohnH]

Looks like you may be gravitating back to that old question about whether to report the income consistent with the employer's reporting, or to try and get him reclassified as an employee for the 1099 earnings by filing the 8919. Right? And whether it's worth saving about 8% of the 1099 amount and risk never working for the employer again.