Dealing with Form 8919 fallout

[FEDUKE404]

I have a client who received ~$20k of "non-employee compensation" via Form 1099-MISC in a situation where he was clearly an employee (worked regular 40-hour week, established work regimen, etc.). The nature of the work was working at a single location, processing incoming orders (phone/mail/etc), and preparing items for shipment to customers, Of course, now the client is staring down the barrel of Form SE. The non-employer's position is simple: "No problem. You can write off everything, including driving to work every day."

The mechanism obviously exists for first filing a Form SS-8, then later on the tax return with Form 8919 where you do not show the "Sch C" income but instead show "wages" and pay the FICA/Medicare stuff that would have been owed, in the first place, as an employee.

It is my understanding the IRS (and likely state agencies?) can/will come down pretty strongly on businesses that are using this end-run. Of course, the business owner is avoiding the payment of his half of FICA/Medicare, unemployment insurance premiums, and workmen's comp premiums.

QUESTION: If you have dealt with this type of situation, what are you aware of that (eventually) happens to the employer? I've told my client it may be wise just to bite the bullet, pay the SE tax, and move on. To a certain extent it is a scenario of "taking no prisoners" and/or "burning the bridges behind you." The small firm might have a vendetta, slash some tires, make life miserable for the "non-employee," etc. (The client saw the light and no longer works there, but does live in the same general area.)

Suggestions from anyone who has first-hand experience with this process and the end consequences? I assume the IRS would likely rule favorably to the client based upon properly presented facts on the Form SS-8 ??

Thanks in advance.

FE

[Rapid Robert]

QUESTION: If you have dealt with this type of situation, what are you aware of that (eventually) happens to the employer? I've told my client it may be wise just to bite the bullet, pay the SE tax, and move on. To a certain extent it is a scenario of "taking no prisoners" and/or "burning the bridges behind you." The small firm might have a vendetta, slash some tires, make life miserable for the "non-employee," etc. (The client saw the light and no longer works there, but does live in the same general area.)

I do have first hand experience, albeit very limited, since as you know this situation doesn't come up very often. As you point out, most workers don't want to rock the boat in a situation where they wish to continue working there, so they take the abuse quietly. However, once the worker knows the relationship is over anyway, they have little to lose. If they fear for the safety of thermselves or their property, that sounds more like a police matter than a tax matter.

When I helped a taxpayer file with the SS-8 and related form, the only thing that happened was a letter from the IRS essentially asking for some of the same information already submitted with SS-8. After responding to that letter, nothing more ever heard. So we don't know what if anything ever happened to the employer. Which makes sense, since it is confidential information under our tax system, right? (unless it turns into a criminal prosecution ?)

The best thing for the worker in this situation is to get paid enough as an hourly contractor to truly cover the SE tax and still leave the expected hourly wage. I still remember one time how shocked I was, personally, when I quit a management job, the employer wanted to keep me on as a contractor for a while, but they only offered the same hourly rate I was already getting as an employee. After I stopped laughing, I gently explained how things worked; they saw the light.

If I were the IRS, and an employer had a squeaky clean record otherwise, with just one SS-8 filed, I'd probably let it go. A pattern, however, would trigger multiple, heavy penalties, including trust fund penalties.

Beware also the state; sometimes they can be more aggressive than IRS when it comes to collecting unemployment tax, workers comp, etc.

[FEDUKE404]

Client has departed job related to potential Form 8919

I do have first hand experience, albeit very limited, since as you know this situation doesn't come up very often. As you point out, most workers don't want to rock the boat in a situation where they wish to continue working there, so they take the abuse quietly. However, once the worker knows the relationship is over anyway, they have little to lose. If they fear for the safety of themselves or their property, that sounds more like a police matter than a tax matter.

When I helped a taxpayer file with the SS-8 and related form, the only thing that happened was a letter from the IRS essentially asking for some of the same information already submitted with SS-8. After responding to that letter, nothing more ever heard. So we don't know what if anything ever happened to the employer. Which makes sense, since it is confidential information under our tax system, right? (unless it turns into a criminal prosecution ?)

The best thing for the worker in this situation is to get paid enough as an hourly contractor to truly cover the SE tax and still leave the expected hourly wage. I still remember one time how shocked I was, personally, when I quit a management job, the employer wanted to keep me on as a contractor for a while, but they only offered the same hourly rate I was already getting as an employee. After I stopped laughing, I gently explained how things worked; they saw the light.

If I were the IRS, and an employer had a squeaky clean record otherwise, with just one SS-8 filed, I'd probably let it go. A pattern, however, would trigger multiple, heavy penalties, including trust fund penalties.

Beware also the state; sometimes they can be more aggressive than IRS when it comes to collecting unemployment tax, workers comp, etc.

Your input is appreciated, and I agree there likely are readers going "what the heck are they talking about??"

I was being a bit dramatic on the non-tax consequences, but at the very least I'm certain some hard feelings would be the minimum result. My client left the firm near the end of 2016. FWIW, we had a late fall tax discussion along the lines of "You're going to do WHAT??" There are at least a handful of other "non-employees" still there, likely enjoying the regular Friday social events and doing a fine job of writing everything off on their taxes. Stated differently, there are several people in the same situation. . .but many/most of them are likely silent on the matter. For all I know, the firm might even have no employees"!! Your comment on state (non-IRS) involvement is consistent with what I thought might be a strong possibility, especially for some of the more "aggressive" states.

As for (likely) not knowing what would happen to the employer, is it a reasonable assumption that a review of the client's Soc Sec wage records somewhere down the road might provide some insight?

Did your client's Form 1040 process, in a timely manner, with the numbers shown on the Form 8919, or did everything go into the great void while awaiting action on the Form SS-8 ? Your best conclusion: Good or bad idea for this person to pursue?

Thanks again.

FE

[taxea]

If you have knowledge that the client is, in fact, an employee by statute then it is your job to do an accurate and complete return. The F8919 needs to be filed if you are signing the tax returns. It is not in your best interest as a tax prepare to "Fudge the facts". Nor should it be of any concern to you what happens to the employer. He is the reason why we all are paying more taxes...he needs to follow the law.

[FEDUKE404]

Fact-fudging ?

If you have knowledge that the client is, in fact, an employee by statute then it is your job to do an accurate and complete return. The F8919 needs to be filed if you are signing the tax returns. It is not in your best interest as a tax prepare to "Fudge the facts". Nor should it be of any concern to you what happens to the employer. He is the reason why we all are paying more taxes...he needs to follow the law.

I never fudge the facts on anything, to include changing a number on a tax document that I disagree with and/or think "it's an error."

I do, however, feel the client should have some say into whether or not to pursue filing SS-8 and Form 8919.

Currently it appears the Form 8919 will be filed, FWIW.

FE

[Rapid Robert]

If you have knowledge that the client is, in fact, an employee by statute

Not sure what you mean "by statute". Common law employment is a matter of facts and circumstances. It is not the INCOME tax preparer's job to determine employment status; that is what Form SS-8 is for.

To try to answer FEDuke's previous question, for my client it was a number of years ago, I don't remember the details. It could even be that the client didn't actually file but got an IRS letter based on the 1099-MISC. I think in the end a balance was due, but much less than the original IRS letter was proposing. This seems to happen most often to young adults who have little experience in the work force other than part-time after school or summer jobs.