Construction work; 1099-Misc Box 3

[Ross]

Just before the client started this construction job he was told he would be an employee paid on a W2. Then right after he started, he was told he was a sub-contractor and would be getting a 1099. He was not happy about this, but needed the money. When it happened, I told him the IRS was cracking down on employees being treated as 1099 workers and he could report them and be treated as an employee. Of course, he needed the money and didn't want to rock the boat.

Later in the year, the same company hired him as a maintenance worker. He received a W2 for his maintenance job ($10k) and a 1099-Misc w/ the amount in BOX 3 ($14k). I'm sure it would be a red flag if the company issued a 1099-Misc w/ amounts in box 7 and also issued a W2 to the same employee. The company is large and has been around for several years, so they should know better. I'm not sure who does their 1099s, but I know they work w/ a local CPA firm. How should my client treat this 1099 income? Schedule C or line 21? TIA.

[Lion]

Today from CCH:

Single worker can be employee/independent contractor simultaneously on separate consulting projects

In an information letter, IRS Chief Counsel has indicated how it is possible for an individual to be an employee and an independent contractor simultaneously, for the same company, when working as a professional consultant on two separate consulting projects. "Employee" status for tax purposes triggers a multiple of obligations on the part of a business; "independent contractor" status, too, requires that the business adheres to certain reporting obligations, although not generally as costly as those related to workers who are employees.

Chief Counsel explained that where an individual provides services in two separate roles to the same business, the IRS examines separately the relationship between the worker and the business for each performance of services. The IRS looks at the behavioral controls, financial controls, and relationship of the parties. If an employer-employee relationship is found with regard to performance of services for only one role of the worker, remuneration with regard to only those specific services is subject to FICA and income tax withholding, Chief Counsel explained.

Whether an individual is an employee under the common law rules is a question of fact to be determined after considering the facts and circumstances in a particular case. The IRS considers three aspects of control when determining whether a business employs a worker: behavioral controls, financial controls, and the relationship of the parties.

Behavioral controls, Chief Counsel explained, are evidenced by facts that illustrate whether the service recipient has a right to direct or control how the worker performs the specific tasks for which he or she is hired. Financial controls are evidenced by facts that illustrate whether the service recipient has a right to direct or control the financial aspects of the worker's activities. The relationship of the parties is generally evidenced by the parties' agreements and actions with each other, including facts that show not only how they perceive their own relationship but also how they represent their relationship to others.

[RitaB]

That's good, Other Rita

This is a great post, RitaL. I have never understood why it is considered a red flag to get both a W-2 and a 1099 from the same company. I'm sure employees do subcontracting work for companies who employ them once in a while, and it's not news to IRS.

Also, self-employment goes on Sch C, even if the issuer put the compensation in the wrong box. Don't go by the form; they are prepared incorrectly all the time. Just like the president skeet shoots.

Regarding throwing the company under the bus for possibly misclassifying the worker - my personal opinion, which counts for nothing, is that it would really be a stinky thing to do after cashing the checks and agreeing to the situation.

[Lion]

Hey, Other Rita!

I see businesses use an IC/1099-MISC and eventually hire them/W-2. And, I see employees retire and get called back to their old companies on a project basis as an occasional IC, helping close the year or cover someone's vacation, that kind of thing. I don't worry about it much unless the company is my client, and I'm advising the company about IC vs. employee.

I think the IRS looks more closely if an employee/W-2 later becomes an IC for the same company, "retires" or whatever, especially if what was formerly payroll taxes seems to be a new windfall for the company or split between the two with the old employee continuing to work for the same company performing the same duties working the same hours, etc.