Employee/subcontractor

[Jesse]

A client started a new sales position in which they will eventually be paid by commission only. From what I understand they are going to receive a base salary until they get a client base established. They have a contract that stipulates that they are an employee for the the base wage, but are responsible for their own taxes as an independent contractor for the commissions received.

Shouldn't they be either an "emoloyee" or an "independent contractor" irregardless of whether pay is based on on the base salary or the commission?

[DaveO]

It depends

If they still draw a "base salary" they should be an employee. If they are paid only on commission and were responsible for their own vehicle and promotional expenses you could argue sub-contractor, especially if they are free to represent other companies. Otherwise I think statutory empolyee is the best they can do.

[Jesse]

He had to sign a contract that states that he can not work for anyone else at the same time in the same field and no compete for 12 months if he terminates employment. I haven't read the contract myself, but with the restrictions and control my client claims to be in the contract it sounds like he should be classified as an employee.

If he is part employee/part Independent contractor how do you determine what expenses are attributable to the role as the employee vs. role as Independent contractor? It just seems that he needs to be classified as one or the other but can't be both while doing the same job? Or am I overlooking something?

He said he had a lawyer read the contract because he was worried about the no compete and his lawyer said it would not stand up if taken to court.

[Unregistered]

Does this individual work for an insurance company? If not can you give us more details as to what kind of sales?

veritas

[OldJack]

He said he had a lawyer read the contract because he was worried about the no compete and his lawyer said it would not stand up if taken to court.

Lawyers always say that as it gets them business.

An employee that also receives commissions with the same company will in all likelihood be classified as an employee for the commissions if audited by the IRS. Even tho the IRS will have collected taxes from the individual they will in all likelihood go for payroll taxes and federal unemployment taxes from the employer and also collect penalties and interest. If the company goes belly up the IRS will most likely go after the "responsible" person for the 100% penalty for failure to collect such payroll taxes. In my opinion this is not a good thing to ignore by filing a 1099 that will undoubtedly wave that big red flag.

[JesseC]

He is selling Concrete/Building tools and materials to General Contractors.

[S T]

Employee vs Independent

Check with your state Employment Laws. In California, they will almost always classify as an employee under these circumstances. There have been several audits that I am aware of. Our Calif requirement for the employee vs independent seems to be more stringent than the Federal requirements. They look very hard to the side of the what the "Employer Control" is.

Here is the 20 factor Checklist (Fed) http://smallbusiness.findlaw.com/bus.../form1-21.html

For reference also a link for Calif Independent Contractor Q & A http://www.dir.ca.gov/dlse/FAQ_Indep...Contractor.htm.

Sandy

[Jesse]

Thanks for responses

I think he is clearly an employee. Now what to do? He wants to keep the job. He will be issued a W-2 for base pay and a 1099MISC for commissions. I don't think this is correct but for my client I am concerned with his reporting.

To report his expenses I am thinking that prorating W-2 income/1099MISC income and taking that % of total applicable expenses for each on the tax return. Any thoughts?

[jainen]

That is the right way

That is the right way to prorate. Please don't let him fuss about office-in-home.

I would suggest he keep excellent records about his time and work performed, such as a log or diary of customer contacts. He should keep a daily copy in a place other than his office, along with copies of the forms and brochures he uses with customers, and all the memos or emails that his employers give him including schedules, etc. Company bonuses and awards for commission work should be documented too.

There are two reasons for this, showing that it is possible to be practical and cynical at the same time. First, he will be able to make sure he is getting paid what he has actually earned. Obviously this company wants to get by as cheap as possible. Second, he will have extremely useful leverage when they try to reassign his accounts or screw him over some other way. He will have the goods to go to the Unemployment Insurance office, bringing down a most horrendous audit on his former boss.

[Jesse]

Thanks

That indeed sounds like some excellent advice.

[Bees Knees]

IRC Section 3508 says that a direct seller shall not be treated as an employee if:

1) substantially all remuneration is directly related to sales or other output (such as a commission basis), AND

2) there is a written contract that says the person will not be treated as an employee with respect to such services for Federal tax purposes.

A literal interpretation of this code is that you can't be treated as both an employee and an independent contractor for the SAME services performed. However, if the person is performing some OTHER service for the hourly wage as an employee, then you could have the contract say the person is an employee for a different job, and an independent contractor for the direct seller job.

[OldJack]

A literal interpretation of this code is that you can't be treated as both an employee and an independent contractor for the SAME services performed. However, if the person is performing some OTHER service for the hourly wage as an employee, then you could have the contract say the person is an employee for a different job, and an independent contractor for the direct seller job.

I agree in theory and would argue the same, but good luck trying to convince your state unemployment office or even an IRS agent for that matter. The client should really ask themselves the question is the red flag worth the trouble and cost to defend?

[Bees Knees]

Good point. In Minnesota, the unemployment people are much more difficult to deal with on the independent contractor issue.

[JON]

In Minnesota

the state UC auditors are funded by the IRS. They retain the funding as long as they audit,I think, 4% a year and share results with the feds.

[Kram BergGold]

How I would prorate

I would figure his tax as if all earnings were W-2. I would add to this 7.65% of the 1099 amount (up to the maximum and if over the max adjust for medicare tax) )to cover his share of SS tax. Then I would do his return and claim enough deductions on Schedule C so that the two returns had an identical tax.
Now I am assuming that your proration of expenses between A and C will result in a higher tax. If I am wrong, and it is lower, than go with the proration.

The other approach is claim Section 530. However this entails some risk to the employer and you probably don't want to go there.