Delinquent payroll taxes

[DTS]

I have four questions, possibly dumb ones, regarding payroll taxes. I have been talking to a potential client wanting me to do his books and final tax return for his corp for ‘07. Books are complete, but wants me to look them over to make sure everything is treated as it should be and in it’s proper place.

After asking some questions regarding “workers”, which he was going to 1099, I told him to reconsider classifying them as employees, as that is what I strongly feel they are. I told him to file all the delinquent quarterly reports and pay all the taxes, penalties and interest that should have been paid during ’07.

1. If he decides NOT to reclassify and report on the 1099 and I don’t do his books, but do prepare his business return, am I looking at any exposure that I don’t want?

2. If I do clean up his books AND prepare the return, I assume by doing both that I will create bad exposure for myself?

3. Am I out of line in trying to get him to reclassify the workers to employees? I think I should, but don’t know if I overstep my responsibilities by doing so.

4. Lastly, if he pays all the employees’ portion of tax, should he then issue a 1099 to them for doing so or leave it alone?

Thank you for your thoughts on this.

Dennis

[Uncle Sam]

I have four questions, possibly dumb ones, regarding payroll taxes. I have been talking to a potential client wanting me to do his books and final tax return for his corp for ‘07. Books are complete, but wants me to look them over to make sure everything is treated as it should be and in it’s proper place.

After asking some questions regarding “workers”, which he was going to 1099, I told him to reconsider classifying them as employees, as that is what I strongly feel they are. I told him to file all the delinquent quarterly reports and pay all the taxes, penalties and interest that should have been paid during ’07.

1. If he decides NOT to reclassify and report on the 1099 and I don’t do his books, but do prepare his business return, am I looking at any exposure that I don’t want?

2. If I do clean up his books AND prepare the return, I assume by doing both that I will create bad exposure for myself?

3. Am I out of line in trying to get him to reclassify the workers to employees? I think I should, but don’t know if I overstep my responsibilities by doing so.

4. Lastly, if he pays all the employees’ portion of tax, should he then issue a 1099 to them for doing so or leave it alone?

Thank you for your thoughts on this.

Dennis

1) Yes - in this situation you have had the opportunity to examine the fact details, and know the actual situation. You'd be preparing a return you know is false.

2) Exposure to what? You rectified a problem that existed based on your being on board to be in compliance with the tax law.

3) Based on your knowledge - if you determine the proper classification and treatment of these workers is to treat as employees and properly report on W-2 rather than 1099, then why do you feel you're overstepping your responsibilities? You'd be considered to not practicing in good faith if you DIDN'T do so.

4) 1099s for employee taxes paid by employer should definitely be given because it was the employees' responsibility to have them withheld in the first place and if employer paid them, employer can't get a tax deduction for it unless the employee is taxed on it.

[ChEAr$]

Disagree

1) Yes - in this situation you have had the opportunity to examine the fact details, and know the actual situation. You'd be preparing a return you know is false.

2) Exposure to what? You rectified a problem that existed based on your being on board to be in compliance with the tax law.

3) Based on your knowledge - if you determine the proper classification and treatment of these workers is to treat as employees and properly report on W-2 rather than 1099, then why do you feel you're overstepping your responsibilities? You'd be considered to not practicing in good faith if you DIDN'T do so.

4) 1099s for employee taxes paid by employer should definitely be given because it was the employees' responsibility to have them withheld in the first place and if employer paid them, employer can't get a tax deduction for it unless the employee is taxed on it.

Well now Uncle Sam (if that indeed is your name! grin), it's not our responsibility. We can not
force any client to do the right thing. You can of course withdraw and get rid of the client.

The client makes these decisions . Our job of course is to advise him the right way and
the potential consequences.

If a client has only "subcontractors", I will of course preparer the 1099's for him, IF he wants,
and will still take a deduction for the expense.

On the upside, it takes a lot of hand holding and encouragement to get clients on the
straight and narrow eventually.

Also, see separate private message.

[DTS]

Taxes

Uncle Sam & ChEAr$,

Thank you both for your input! I wanted to clarify my #2 question, as I did not really finish my thought and I think this may be where there is a little disagreement.

I wanted to say in #2 that "If I do clean up his books AND prepared the return knowing that I'm reporting something I feel is incorrect like the issuance of 1099s when I feel a W-2 is the correct reporting, am I liable, if I do both?"

I've heard both sides of this discussion, but never a concrete answer. When I read the criteria for Employee vs. IC, in my opinion, there is no question in my mind they are employees. Yet, this discussion always leads to whether it's my responsibility to make this decision for the employer.

Would you both mind elaborating on this a little for me, as I do want to do the correct thing.

I won't mind a little disagreement!

Dennis

[LMathey]

I am just learning my way around this board but will attempt to answer your questions.

1. First of all, have you applied the tests for independent contractor and feel certain they are employees? If yes and he does not agree to report the "employees" correctly, I would not prepare the return. How many other things is he hiding in his books? Is he running personal expenses thru his corporation? This is a final return and as such will be scrutinized by the IRS. In Ohio a corporation has to file dissolution papers with the state. These need attached to the final return along with an analysis of what happened to the assets of the corporation and if any assets or liabilities remain.

He is trying to avoid paying his share of FICA, worker comp, FUTA and SUTA. I would not want to sit across from an agent in a couple years and try to justify this. In addition, how many years has he been issuing 1099's instead of reporting his employees?


2. If you do clean everything up, this does not create exposure for you. However, you may find yourself answering a lot of correspondence from all taxing agencies and spending much more time than you imagine. Be sure he is prepared to pay for your time.

3. I had a similiar situation two years ago. I had an Amish furniture maker that was reporting about half of his full-time people as employees and the rest on 1099's. He had been in business for 18 years and this was a long-standing issue. I knew what huge costs in interest and penalties awaited him. He was only willing to correct the current year. I felt all agencies would audit him as soon as they received one year of corrections and he would be very angry. Not knowing how many years they might go back, the dollars could have been huge. In addition, he only wanted to pay me $10 per hr and felt this should only take 10-20 hrs. I declined to be engaged by him.

4. Finally if he pays their taxes, in my opinion, that would constitute additional wages and needs grossed up for tax as well. From my dealings with IRS, I do not believe that it is ever proper to 1099 an employee. All amounts should be on a W-2.

Linda

[Uncle Sam]

Delinquent Payroll Taxes

DTS-
Under your clarification of #2 - Yes - I feel you would have exposure if you knowingly prepare the return you know is incorrect.

[DTS]

Uncle Sam and Linda

Thank you for getting back to me on this. I appreciate it.

I agree that this is what I'm looking at, if I proceed in doing both items. I expect a call sometime the first part of this coming week to see how to proceed, but I think he'll see things my way, at least that was his tone the other day.

Linda, I printed up a questionaire for him to look at and told him to answer the questions as to whether they are Employee vs. IC. We talked after he read that. In answer to your question to me if I'm certain they are employees, I am more than certain and I believe he is now, as well.

Your second question was "what else is he hiding". From what I can see, so far, nothing. The IC issue was not trying to hide employment taxes and trying to cheat the government, rather ignorance. This fellow is not trying to sherk his responsibilities and I believe the fact he is trying to make sure everything is "above board" says that.

Welcome to this great board, Linda. We have so many wonderful people that contribute their knowledge to the rest of us. It sounds like you'll be another one of them!

Thanks, again for your help.

Dennis