Day Labor

[BOB W]

I like........

............ loading expenses a bunch....... somewhat devious but correct. Causal Labor is more general and can mean alot of different things in the eyes of the beholder.

There comes a time when doing everything correct can be taken to an extreme. Casual/Day Labor is not my choice of "need to be correct" when the $$s are small, but when it gets up there, I have a big problem with my clients who claim to have spent large amounts. Where is the cut-off point?

Well, my cut-off point is in relationship to the size of the business. Once a business gets big enough where it is impossible for the owner to have done the work all by himself, then I push for employee info and become very strict on any claim of casual/day labor. Even to the point where I give him no deduction for any payments, he eats the taxes by getting no deduction.

I tell him, if he wants the deduction he has to set up payroll for his casual labor (which I believe now is the same laborer everyday). No one would run a business on a chance of getting a laborer whenever he wants one.

Another consideration in giving a client a deduction for casual/day labor is the likelyhood of the business receiving cash from customers. If that likelyhood is very probable, whether a small or large payouts to casual/day laborers, then I give him NO deduction anywhere, not even "loading expenses". Yea, some of my clients are greedy and they want it both ways, no income and get a deduction (double dipping).

[Black Bart]

No W-2?

Since the $100 is below the withholding tables for a single person claiming one exemption, no W-2 needs to be filed with the employee or the Social Security Administration..

Is this right? I thought a W-2 form had to be made on any amount paid and that the withholding tables would have no effect on that since FICA should be withheld on any amount. Also, how would you balance the total wages on the 941 forms with the total on the W-3 form at year end?

[BOB W]

w-2

I never argue with the boss, but you are correct. That was the same thought I had when I read the "boss's" response. That is also why I don't bother with small payouts. "The cure is worse than the problem."

[Joe Btfsplk]

Day Labor

The simple solution is to give them a 1099. I have a contractor's son who works for this father. He said his father used to give W-2s, but the workers thought the tax he withheld was going into his pocket instead of to the govt. so he switched to 1099s.

I asked what would happen if they failed to file a tax return and report it. He said they all filed because they got the Earned Income Credit and didn't have to pay any tax anyway even though they had to pay SE tax.

Of course, there is a risk of them asking for unemp benefits.

[Black Bart]

Chances of being "checked"

Whether or not we agree with the opposing views presented here, I think we should more realistically answer geekgirldany's question ("I just wonder if the IRS will start to question this. Surely they know what is happening.").

My experience over the years is that IRS doesn't know what's happening. Of course, they probably will if the income tax return is audited for another reason. If that happens, then there's a more than fair chance that payroll will be dragged into it, but outside of that I've seen no evidence at all that Taxmandan's assertion that "the IRS will certainly disallow any and all expense deductions for wages or labor on the business return" is a foreordained result. The only other time I've seen any response from the feds is if the wages on the return don't match the W-3 total (and that infrequently, and from SSA rather than IRS).

Granted, the states are much more aggessive than the feds. They're hungry and their rules are usually much stricter with regard to what constitutes "casual labor." On the other hand, I've seen people audited by state unemployment (because, as Taxmandan said, the laborers can, will, and do sign up for unemployment after the job's over), but the agents didn't hand over any info at all to the 941'ers or state W/H crowd. As to workmens' comp (very expensive and widely ignored by contractors); that department exists, but ours makes a token appearance only about every five years or so. I can't speak for others, of course, as I'm in the boonies (Arkansas) and your IRS district or maybe urban and larger-budgeted state may have stricter policies.

Anyway, like it or not; enforcement plays a fair-sized role in some preparers' treatment of casual labor. Everybody draws the line somewhere and whether we are strict or loose about that line depends of whether we agree with, say, jainen ("anything other than wages is plain tax evasion"), or Bob W. ("doing everything correct can be taken to an extreme"), or somewhere in between. I think we should more accurately state the true risks rather than brandishing "enforcement" in support of one's particular point of view.

What's your experience with enforcement in your IRS district and your state?

[Jesse]

Not always so simple

The simple solution is to give them a 1099. I have a contractor's son who works for this father. He said his father used to give W-2s, but the workers thought the tax he withheld was going into his pocket instead of to the govt. so he switched to 1099s.

I asked what would happen if they failed to file a tax return and report it. He said they all filed because they got the Earned Income Credit and didn't have to pay any tax anyway even though they had to pay SE tax.

Of course, there is a risk of them asking for unemp benefits.

This solution might seem simple now but could get your client in a lot of trouble down the road. As stated earlier, there are so many issues other than “just” Federal payroll taxes. What if some one gets hurt? I was issued a subpoena last fall for one of my clients, he was in the “construction business” and was injured on the job. He filed tax returns as SE but after being injured he says he was an employee. The courts will decide the outcome and facts and circumstances spell out employee.

I tell my clients even if it is a relative or friend that you can "trust with your life", if something happens it may be out of their hands because you could have the insurance companies – and the lawyers - get involved and no one wants to pay for anything and everything snowballs. Medical bills, unemployment, disability, lawyers…….the bills become endless and you have one insurance company sueing the other and the lawyer telling the injured there could be a sizeable settlement.

[oceanlovin'ea]

I like that idea

That would satisfy filing requirements for 941 and 940's too. The only problem I see is with state withholding because the state form requires a SSN.

I have a couple of small restaurants and a new detailing business. Sometimes they will work someone for a couple of weeks not as employees to see if they are going to work out. They will call them contract labor or something like that. But it usually amounts to less than $100 in a week's time. I tell them they have to put them on payroll as soon as they can. They have followed through on doing it that way.

Linda

[Bees Knees]

Is this right? I thought a W-2 form had to be made on any amount paid and that the withholding tables would have no effect on that since FICA should be withheld on any amount. Also, how would you balance the total wages on the 941 forms with the total on the W-3 form at year end?

Form W-2 Instructions:

"Who must file Form W-2.
Employers must file Form W-2 for wages paid to each employee from whom:

• Income, social security, or Medicare tax was withheld or

• Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate."

Technically, an employer that chooses to pay the employee's portion of the wage through a gross up arrangement has not withheld any FICA tax. The employee agreed to work for $100. You gave him the $100, and paid the FICA for him. To me, that's not withholding. So if you don't need to ever withhold income tax because claiming one exemption on the W-4 means zero withholding from the tables, then no W-2 needs to be filed.

As far as matching the 941 with W-2's filed, you simply wait to be questioned, and your answer is the W-2 filing requirement was not met. That's why those W-2s were never filed.

[JON]

You W/H if you sent it in

If you would have asked the employee whether he wanted FICA/MEDI W/H or paid to him-he probably would have said pay it to me. I do not think the employer's choice of grossing it up gets you out of W-2 reporting. By grossing it up you W/H it. The $100 became the "net" by the act of grossing it up. IMHO

[Bees Knees]

If you would have asked the employee whether he wanted FICA/MEDI W/H or paid to him-he probably would have said pay it to me. I do not think the employer's choice of grossing it up gets you out of W-2 reporting. By grossing it up you W/H it. The $100 became the "net" by the act of grossing it up. IMHO

I agree, except we are talking about guys you pull off the street who want cash...people you never see again. They don't WANT you to report it to them on a W-2 because they have no intention of counting it as income.

I'm not trying to justify why they shouldn't report the income. We are talking about the payer. The payer avoids penalties for not treating the person as an employee because the payroll taxes are already paid.

What's the IRS going to do if they audit you and say you should have treated your day labor as employees? You say "I did." Here's the FICA tax I paid on them.

The penalties for not treating someone as an employee all center around not paying FICA, which would not apply here.

[geekgirldany]

If the amounts were small I would see no problem in casual or day labor. But this client is getting cash out of the bank for around $2000 a week. You do the math. That is alot of money to spend on day labor. That is why I think it will really jump out on the tax return. I'm going to insist that they do something. It is really ridiculous. They are using these illegals because they are cheaper. I'm sure they won't work for my client when they ask for a SS/ITIN number.

Now talking about listing casual labor under a different expense. Well I have done that before but unknowingly. A former client whom I did bookkeeping for listed some check stubs as job materials. As though they had bought job materials from these people. They were really subcontractors. I didn't find this out until much later.

I will not though place $50,000 in casual labor under job materials. This is totally dishonest. If they are paying it out to day labor then I am listing it as that.

[Armando Beaujolais]

There's a theme among many of the responses to this question.

"File and hope you don't get caught."

Bad move. I'm known by some colleagues as being aggressive, and I've stretched almost to the breaking point with some deductions for clients. However, if I'm at a point where I have to say a prayer when I file the return, I won't do it. Sure, I might put a fancy name on a smelly deduction in hopes of helping the return die a natural death through the statute of limitations, but if it raises from the dead I'll be able to defend my position with something stronger than "I was hoping nobody would notice."

Think about this. The moment you come to believe your client is skating the rules - hiring people without verifying worker eligibility, calling them independent contractors, calling them ghosts and not filing anything, you become complicit in the scheme. Do you honestly believe that when the authorities grab your client by the collar and start breathing down their neck your client will say "My tax preparer just did what I told him to do?" Get real.

Sure, I have a "reasonableness test" where I won't bother to get my boxers in a bundle when somebody says they paid a few bucks for labor and didn't do the paperwork. That test is my impression of whether the client (and possibly myself) could write a check on the spot to cover the back taxes, interest, penalties, etc., when they get caught.

Years ago, at the instruction of the president of the firm where I worked, I filed a return where I knew significant amounts could not be verified. I didn't sleep as well for the next three years. It wasn't worth it.

[taxfun]

Did you see the article about the IRS commissioner's recent tesimoney before Congress stating that he is again recomending that all 1099 income be withheld by the payor? He also wants 1099s to corporations, etc. as well. We'll see!