Non-Cash Compensation

[Corduroy Frog]

Numbers are not real in this question, but the principle is in question.

I have agreed (at least at this point) to prepare a 2011 return for a proprietor. Proprietor had a facility, and employed a guy to
work around the shop some. Guy was on disability and didn't want a W-2. (You've all had this situation before).

Proprietor tells the guy that he won't put him on payroll, but instead would buy a used Jeep for $11,000 and allow the guy to
assume ownership and title. The Jeep was in return for the guys "work around the shop."

The instructions for Form 1099-MISC says "cash payments to recipients." This didn't happen. But what about cash payments
ON BEHALF of recipients? I'm thinking the guy needs a 1099-MISC and too bad about the disability he is lying about.

I am going to try and file this return, so please don't respond by telling me these guys are scumbags and I shouldn't engage
myself with this proprietor. The proprietor has done an about-face in later years, as an IRS auditor adjusted his thinking
with an audit in 2012.

[MDEA]

1099 misc

This was a barter arrangement report the same way you would if you paid him cash.

[ATSMAN]

MDEA is correct. Last year I had a similar situation. Lady worked at a dealership of her relative to fill in for the receptionist who was on maternity leave. Instead of getting cash compensation she got a used car. 1099-Misc for the FMV.

[TXEA]

I tend to disagree. The key word you used was "employed" and the other example was "worked at a dealership."

Both of these individuals were employed and not engaged in a contract services business. The Jeep and the car should have been shown on Form W-2.

Either way (W-2 or 1099) this guy is likely to have disability problems going forward.

[Roland Slugg]

A few stray comments and questions:

1) The guy was an employee, not an IC. He should have been issued a W-2.
2) Are you sure about the "cash" payment requirement? I can find no such requirement in the 1099 general instructions or the 1099-MISC specific instructions.
3) Is the issuance of a W-2 optional? Can someone just tell his employer that he doesn't want to receive a W-2, and the employer is excused from issuing one to that person? If so, I think I'll try that myself some time.
4) I won't tell you to walk away from this client, but I will advise you that if you agree to prepare his tax return(s), to prepare it/them correctly. Don't aid and abet tax cheating, or you become a tax cheat yourself.
5) If the shop's owner doesn't want to report the $11,000 FMV of the Jeep on a W-2 or a 1099-MISC (in box 7), then he shouldn't take a deduction for that amount as a business expense on Schedule C of his own tax return. He can think of it as a gift, I suppose, forego the deduction, and pay higher income taxes and, perhaps, higher SE tax. That treatment doesn't fit with the facts, but at least it will yield a tax-neutral outcome. (Actually, it's probably not tax-neutral, but will increase the proprietor's taxes by more than it saves the disabled worker.)

[Burke]

Due to the employer-employee relationship (whether or not he was on the payroll), the car cannot be treated as a gift. It is considered compensation for "work around the shop" by the employer's own statement. He should be issued a W-2, shown in Box 1, 3, 5 and the employer will be liable for the SE tax.

[Corduroy Frog]

To All Respondents

Thanks to everyone who has responded. This is an oft-discussed topic, and it is clear that this proprietor should have had a payroll.
There is some question as to who was really running the shop, as they would tell people "we're sorta partners." The proprietor didn't really pay himself either, except in personal expenditures of approximately equal amount. However, the proprietor was only party responsible for anything.

I believe we are confronted often with the choice of issuing 1099s or W-2s, and we all know that issuing a W-2 would be devastating. A 1099 from the proprietor would be harmless as he would have no payroll taxes. Is there a way to shortcut the W-2/W-3 process yet create payroll taxes that should have been paid by the proprietor (employee & employer share)?

[Jiggers]

Isn't the employer assisting the employee in committing fraud? Last I heard is that it is a crime to commit fraud.

[Burke]

I believe we are confronted often with the choice of issuing 1099s or W-2s, and we all know that issuing a W-2 would be devastating. A 1099 from the proprietor would be harmless as he would have no payroll taxes. Is there a way to shortcut the W-2/W-3 process yet create payroll taxes that should have been paid by the proprietor (employee & employer share)?

Had the owner retained ownership of the vehicle, and required the employee to commute to and from work in it, prohibiting all but de minimis personal use in a written document, he could have used the lease valuation table for determining the amount to be imputed on his W-2. (Which would be much less than $11K). However, by transferring ownership to him, IMO it needs to be treated as straight-out compensation. While the employer may pay the SE tax, he is supposed to recover the employee's portion from the employee. If this is not done by 4/1 of the following year, then it is treated as additional compensation.

[TaxGuyBill]

If this is not done by 4/1 of the following year, then it is treated as additional compensation.

I've never heard about the 4/1 deadline before. Do you know where that is found?

I've just 'heard' that if they are a current employee, to take the missed employee FICA from their wages (no matter how long it's been). If they are not a current employee, try to get the missed FICA back and if that doesn't work, THEN treat it as additional compensation. Maybe what I 'heard' was wrong.

Thank you.

[Corduroy Frog]

Just an added comment

...that I haven't shared yet...

An IRS auditor is already on his case for 2011. It is typical for an auditor to not stretch an assessment from something
manageable and collectible to something uncollectible. They can choose to make it miserable on the taxpayer but at some
point it does become counterproductive to do so.

I've had some experience with auditors allowing a 1099-MISC to avoid the length of time IRS would take to process a
941/W2 series. And they get most of their money, the State Unemployment people are usually the ones that lose on this
kind of arrangement.

[Kram BergGold]

I found something that supports 1099-Misc

Google, reporting barter on tax return.
Then look for barter topic 420.

The way I read it, when you exchange goods or services you put it on a 1099-Misc

[BP.]

The way I read it, when you exchange goods or services you put it on a 1099-Misc

And your reading aligns with the info provided on TTB p. 5-10.

[taxea]

I think more info is needed on the guy that got the jeep....did he qualify under the employee rules or did he set his hours etc?
The receptionist definitely was a temp employee and that requires a W2 issued.
file a sub w2 and ss4 with her return if the employer won't issue a w2. He can adjust his books accordingly for the cost of the vehicle.
As for Mr. Jeep...same thing pursuant to employee vs IC determination.