Subcontractor-Employee Problem

[geekgirldany]

Client hired a person to answer the phone and make appointments for his business. The person worked any hours they wanted as long as the phone was answered to help customers with questions and scheduling. My client gave the person a cell phone and he worked from home not at my clients office.

My client treated this person as a subcontractor and he was issued 1099-Misc for 2012. He worked for my client a couple of months in 2013. He was laid off because of lack of business so he went to the State Unemployment office to start collecting unemployment compensation. The State talked with my client and concluded that since this person did not have a business offering the same services to other people then he was an employee. So my client paid the State Unemployment Agency.

Now the subcontractor/employee is wanting to amend 2012 tax return and for my client to send him a W-2.

I am trying to figure out the best way to do this.

Client says he will pay but only his half not the employees half since it was never withheld from pay.

I believe the best way is for the "subcontractor" to file a SS-8 and Form 8919. This will take care of him paying his part of the taxes. Then my client will receive a letter from the IRS notifying him the outcome. Now from there I believe I read that the IRS leaves it up to the employer to file the returns to pay their part but I am unsure.

I've never dealt with this situation from the employers side and would greatly appreciate any input.

Thanks
D

[JohnH]

Approximately how much did he pay the person in 2012 and 2013?

[ATSMAN]

I think there is a big difference between a state unemployment agency making a determination that this person is an employee for unemployment benefits and the IRS making a determination that it is an employee for W2 purpose.

Obviously it will depend on the facts and if the business owner had control over how the phones will be answered and what will be said etc. The fact that he worked out of his home is not material. One factor that can be material is if this person provided similar answering service to similar businesses.

I have a client who does answer 2 doctors offices when they are closed or after hours. She is paid weekly at $12/hr and 1099-misc issued each year. In 2009 she was in an accident and could not work so she filed for unemployment. A partial unemployment benefit was allowed but for tax filing purpose she still did Sch C that year because no W2 was issued or required to be issued.

[geekgirldany]

Thank you for posting.

In 2012 he earned around $12,000 and I do not know on 2013.

Client said sub did not provide this service for anyone else.

[DaveO]

You must also consider the late filing penalties for the 941 forms which are some of the highest the IRS assesses. I would do this only if the IRS did an employment classification audit and reclassed the person.

[Burke]

Many states have a reciprocity agreement with the IRS, and will share information they uncover on these employment audits. They pretty much use the same criteria. You may be able to Google that info to determine if your state is one of those. I know Virginia is. However, I agree with the others. Wait until you get some notification from the IRS before doing anything.

[JohnH]

My reason for asking the amounts was to try and calculate the marginal cost of simply grossing up the payments and paying both sides of the FICA/Med tax. Then you'd need to add penalties and interest, including costs for late-filed 941's, as well as calculate the ongoing monthly cost of this being discovered later.

I think you're going to need to run through this calculation anyhow, just to give the client good information about his potential risks of doing nothing. Add to that whether or not your state shares info with iRS on I/C's. Then let the client make the choice.

[geekgirldany]

Thank you all for the posts. Very helpful. I will let my client know what to expect. It appears that Georgia is not in the list of sharing info with the IRS.