Your Client’s 1099 Should Have Been a W-2
By Eva Rosenberg, EA
Due to the widespread problem of employees getting 1099-MISCs from their employers instead of W-2s, the IRS created a new form in 2007 – the Form 8919
. Using this form has saved employees thousands of dollars, while protecting their Social Security records and their tax status. Though it does take a little finesse to use this form and this strategy.
Who is allowed to use this form?
Form 8919 may be used by people in these 9 situations:
So the client fits one of those categories.
- They had a job and the employer ended up not paying that person as an employee, but as a freelancer.
- They got a W-2 from your employer for their basic duties. But when it came to bonuses and commissions, the employer put that on a Form 1099.
- They started the job thinking they were an employee, but the taxpayer and the boss are unclear about the correct status, so you helped your client file the Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating that your client is an employee of the firm.
- The client was designated as a “section 530 employee” by the employer or by the IRS prior to January 1, 1997. That’s a special category for people in certain industries where it’s common to treat workers as freelancers.
- The taxpayer has received other correspondence from the IRS that states they are an employee. Often, as a result of an audit of the employer.
- They were previously treated as an employee by the firm and they are performing services in a similar capacity and under similar direction and control.
- The co-workers are performing similar services under similar direction and control and are treated as employees.
- The co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.
- You have helped you client file a Form SS-8 with the IRS and have not yet received a reply.
How do you report their income on their tax return? And how do you handle deal with the 15.3% self-employment taxes they would normally have to pay on that 1099-MISC income? After all, as an employee, they would only have to pay 7.65% on the wages. At $50,000, they are stuck paying nearly $4,000 extra because of that 1099-MISC.
This is going to take a bit of extra work. Why?
One of our goals is to avoid tangling the IRS computer. The IRS computer looks for income to appear wherever the particular form that was issued is expected to be reported.
Step 1 - Start out by reporting all 1099-MISC income on Schedule C - Profit or Loss From Business
. Whether it’s correct or not.
Step 2 – In Part V of Schedule C, deduct the amount that should be wages. (This is just in case you have other 1099-MISCs that are correct.) On the description line, write “See Forms 8919 and Form 8275 Disclosure.”
Step 3 – Fill out Form 8919
, reporting that 1099MISC income in column (f). If they happened to have also gotten a W-2 from that employer as part of their income, you can simply use code H in column (c) – and you’re done. If not, there’s another step to take – and it’s a biggie.
Step 4- Fill out Form SS-8
. This is an intensely detailed form. This is where you describe the taxpayer’s job and the work they do. This is where you convince the IRS that they really are an employee. If there is anyone else at the company being paid as an employee, be sure to compare their job to his or hers and why the nature of their employment is not really any different. This form can take several hours to fill out. Attach any evidence the taxpayer provides of being treated like an employee. For instance, working in their offices; using their computers and telephones; having their extension on the company’s voice mail; having to wear t-shirts or jackets with the company logo; having to work during their specified hours; having a key to the office or facilities; having a company business card with the taxpayer’s name and title on it. The more proof you provide, the better are your client’s chances of getting this approved.
Note: You need to send a copy of the SS-8 with your tax return and to a separate IRS address in Holtsville, NY
When the IRS approves you as an employee, you save that 7.65% that the employer should have paid. That’s a huge tax break.
OK, here is the downside to this procedure.
When the SS-8 is filed, the IRS contacts the employers to get their side of the story. Oops. This is a rather uncomfortable situation for the employer – kind of like a mini-audit. And it can turn into a full-blown audit going back 3-6 years.
So, if your client got a 1099-MISC that should have been a W-2, and he or she wants to keep their job, think twice about filing this Form 8919 and SS-8. Even if the state has laws preventing your client from being fired, they may wish they had been fired. Employers have been known to make life a living hell for employees who have turned them in.
How can you help your client avoid the hostility and danger?
Here are two ways you can handle this.
1) Discuss this employment arrangement with their employers and ask for your client to be reimbursed for their share of the extra taxes, or to be put on payroll from now on.
2) File the tax return without using the Form 8919. Advise the client to look for another job. Once they find another job, you have three years to amend that tax return. Then you can use Form 8919, and get the money back. (Right now, that means you can still amend 2017 until April 15, 2020 – or until the date they filed, if they had an extension.) Once they have left that job, the client won’t care if their previous employer is contacted.
Your client is an employer and is really mad about the workers learning about this. What can the employer do?
Honestly? Get with the program. It’s time to look at the team of workers and put the employees on payroll. Don’t worry about an IRS audit. If they take this step before the workers turn the employer in, there is a very generous amnesty program for employers. It’s called the Voluntary Worker Classification Settlement Program
(VCSP). It takes about two months to get approved in the program. Employers who are approved receive a guarantee that the IRS will not audit their past payroll activities. And they only have to pay 10% of the payroll taxes they would have paid for the previous year, without any penalties. This is a terrific deal. But it’s only on the table as long as the employers are not under audit. Once the employees file those Forms 8919 and the IRS starts to investigate, it will be too late.
There is no special arrangement with the state employment authorities – but now that California has passed the Dynamex Bill, the state may consider offering a similar program, as a result of our discussions at September’s State Tax Agency Liaison Meeting (STALM). At least, the IRS will not send them any information about the VCSP approval. However, if the employers are audited, the state will be notified.
These tips can help both labor and management deal with the burdens of payroll taxes a bit more fairly. Perhaps it’s time to come to a meeting of the minds.
Eva Rosenberg, EA
is the publisher of TaxMama.com
®, where your tax questions are answered for free. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy
– available at your favorite bookseller. Eva teaches tax courses at IRSExams.school and CCH CPELINK
. [ Note: The consumer version of this article was originally published in Dow Jones Marketwatch.com. Copyright Eva Rosenberg © 2019 ]