IRS Reclassified Subs as Employees

[Unregistered]

I have a client that had been treating their help as subcontractors. Well, one of them applied for unemployment and after researching the situation, the Service said they need to be reclassified as employees and all past payroll filings need to be amended. What is involved with getting this resolved? I assume the employer has to pay the employee's and employer's ss and medicare. What about Federal and State withholding taxes? Can the employer go back to the employee to get reimbursed for the taxes that were never taken out?

The employer has since converted everyone over to employees. They truely believed the help could be deemed subcontractors. The ironic thing, is the guy who brought this all to light with the Service STILL works for the company and WANTS to be treated as a subcontractor. He didnt realize what he was doing when he applied for unemployment.

Any assistance would be appreciated.

[Unregistered]

More info

Need more info: what type of work.

[Unregistered]

More Invformation

They own several adult foster care homes...

Thanks in advance

[Snaggletooth]

Subcontractors

..yes this controversy has been going on and it is very common for people to call themselves "Subcontractors" when they work under the direction of someone 40 hours a week for the same rate of pay.

In my part of the country, the scenario happens every now and then: A contractor doesn't want to fool with payroll taxes, so he says he will pay a guy "straight out" meaning no taxes will come out. Since the employee commonly loses a chunk of his paycheck to taxes, this arrangement makes him deliriously happy, and presto!! a "subcontractor" is born. Sometimes the contractor even offers to pay him under the table without a 1099 - and if this occurs with one of MY clients, that means I won't allow him to even deduct such payments. Often as a result of my refusal to deduct, the contractor ends up effectively paying taxes himself on these under-the-table amounts and the contractor thus changes his ways.

Under-the-table payments still happen, although I'm unaware of them, and even though the contractor knows I therefore can't deduct them. The existence of a W-2 or 1099 has been responsible for knocking some people off the disability rolls.

This arrangement works until the guy is laid off or quits. Then he goes to apply for Unemployment, and the State finds out that there has been no unemployment tax paid in on the guy. When the State begins asking questions, the guy acts like he knows nothing about his employer not filing taxes or why no taxes were deducted. Further he confirms that he was working 40 hours weekly, under the direction of the contractor, and didn't work for anyone else.

The "employee" now becomes an avowed disciple of tax withholding and the proper employer-employee relationship. This sudden miraculous transformation has everything to do with whether he is allowed to draw unemployment or not...

[Jesse]

Good Luck!

If you have to reclassify you could have a huge mess. You have FICA, FUTA, and SUTA; depending on the state you could have mandatory Disability and Work Comp and the fines, penalties and interest. If I were you I would hope that you could keep them classified as Subcontractors, not that it is a choice, but by facts and circumstances.

You stated it was for owners of adult foster care homes, but what were the duties, who had control, how did they get paid (hourly, salary, per job), etc, etc.....the list of possible factors goes on. Federal and State rules for classification could be different as well.

Snags, you posted as I was (between interuptions) writing a response and I must say you hit the nail on the head.

[taxmandan]

Reclass of IC to employees

You may have some small hope under section 530 of the Revenue Act of 1978, but not enough information on your post to know for sure. This is the safe harbor rule that can mitigate the back taxes for the employer in a reclass. but can be very difficult to meet the rules. Also see Imholte v U.S. 91-1 USTC paragraph 50,079 (Bankr. Alas., Aug 21, 1990)

[JON]

They have already switched them to employees????

If they have done that, how can you argue anything. "Fuller Video" here in the land of taxes was examined for this years ago. They used subcontractors for shoots for production of TV and films. The IRS came to town to make a point. The IRS announced a meeting where they would present the problems with calling it subcontractors for the sound, film and video business. The IRS said everyone in the industry should be an employee and there was always a chance that they may be a part time employees. Basicly part time does not mean subcontractor. The meeting got out of hand. The local association hired attorneys($$$$$) to get anwsers for the industry. What came out of it was a 210 page explanation of subcontracting and later some direction from the IRS. Fuller went out of business-they were assessed FICA and 5%(? I think) federal withholding. They asked the IRS what they could/should do about the 1099s that were sent out and the IRS really did not care, but admitted if they were provided to the employees/subcontractors with the information (W-2s) they would be able to amend their returns. The IRS could care less if they were notified or at least was not going to inform anybody from their offices.

As a result of the association no further audits were happenning. IRS had promised to expand the audits. You got the 25 tests and other information from the IRS, the one safeguard is to show it is a standard in the industry to treat them as subcontractors.

After Fuller locally contractors handed information packages out to subs telling thim to incorporate as an S Corp if they wanted to remain on the vendor list. A bunch did do that...