Buy out 1099 or w2

[taxtime]

I have a client who works for his dads retail business (actually all the kids work there with no stock ownership or any ownership rights of any kind). One of the kids wants to pay my client 150,000 to leave the business (all other parties are in agreement). He has asked me the tax effects. All this would be ordinary income to him. I guess my question is should this be reflected on the w2 or a 1099? Thanks for any input.





Larry

[BOB W]

If....

... there was an employment contract, which there wasn't, and that contract was to be bought out it would be on a W-2.

Can't think of any situation involving an employee where a 1099 would be used.

[taxtime]

Thats what I thought. I did see a way you could get a w2 and a 1099 at the same time. Thanks Bob.

[JAinNC]

How was he paid before? If he was a real employee, could some of this be severence pay? In some states a certain amount of severance is not taxable in certain situations.

Jeannie
EA ( ATXer just a' driftin' )

Now you can see which board gave you the faster response.

[taxtime]

He is a salaried employee. I will check into the severance pay. That may be the way to go. I was looking to treat it as a bonus or normal wages. I think the employer ,for obvious reasons, wants to issue a 1099. That is not going to work. Thanks for all the input.

[Unregistered-long ago]

Covenent not to compete

could prevent it from being wages....

[Jiggers]

Covenant not to compete

I would look into this. Maybe the payment would be a covenant not to compete, and that goes on a 1099 "Other Income".

[Bees Knees]

I agree. The covenant not to compete would be one situation where a W-2 employee receives a 1099, with income reported in the "other income" box, not the non-employee box.

A covenant not to compete is ordianry income, but it is not subject to FICA or SE tax.

[BOB W]

Facts......

... and circumstances may control with this situation. Remember this is a family member and could have a rotten smell if IRS was to question this 1099.

[OldJack]

I agree with Bob... this smells. As I understand it the clients brothers and/or sisters want the client to go away and them deduct the $150,000 as an expense from dad's business? It is certainly a questionable ordinary and necessary business expense regardless of what it is called? It would appear that the kids are paying the client his share of "dads inheritance" now if he will just go away.

[Roland Slugg]

Clarify who is making the payment

One of the kids wants to pay my client 150,000 to leave the business.

So far everyone who has responded assumes you meant, "One of the kids wants the company to pay my client 150,000 to leave." That may be what you meant (and probably is), but it isn't what you wrote.

If it really is a situation where one sibling is paying another to take a hike, it wouldn't be reported on a W-2. In fact the payment might not be ordinary income to the recipient at all, although I do lean toward the "non-compete" idea. Still, it may be worth exploring.

[taxtime]

It is a convoluted situation. I just had lunch with my client. They basically want him to leave. They cannot get a long at all. The father and both siblings want to pay him to leave. That’s why I think if he is paid from the business it should be reportable on his w2. What if they structured the payments in a package that encompassed multiple years? He would like to set it up in a way he would get the same salary each year until he reached 150,000 (with would be 2 years of payments). I think if the siblings paid him outside of the business it would be ordinary income not subject to SE. Maybe the way to go is compose a non compete agreement. Thanks for all the input.

Larry

[OldJack]

In order to justify the payment as a business expense one question begs to be asked.... why doesn't father just "fire" the employee (his son) with the normal last worked paycheck? There is more here than a normal business transaction that would be deductible.

[BOB W]

Non-Compete......

.... agreements do not allow immediate write-off of the payments. I also have a feeling that this agreement is to bar the payee from ever claiming any inheritence in the future relating to this business and will make a lifetime non-compete clause. Doesn't sound like an employer-employee covernant.


Sounds more like a gift from father and kids> personally

[taxtime]

I am not sure why the dad just does not terminate the employer and employee relationship. The strange thing is that he will still inherit 25% of the business when the father passes away (according to the son). I know the entire family. I think it may warrant a call to some of the other parties involved to determine exactly what is going on.

Thanks again for the input.