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Employee incorrectly classified as Independent Cont.


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We have a doctor that sponsors a SIMPLE IRA plan. He has an associate (doctor) that he was treating as an independent contractor. It was later determined by a State auditor that the associate should have been treated as an employee.

Since the associate wasn't considered an employee by the employer, he was not offered the SIMPLE plan. If the associate would have been considered an employee from the beginning, he would have been eligible in 2006.

Since the associate was subsequently re-classified as an employee, for the SIMPLE purposes, I would think you should treat him as an eligible employee in 2006 forward and correct under the EPCRS program by having the employer make a QNC for missed deferrals plus earnings plus related match, etc.

However, a question came up: Since he is not a rank and file employee, is there any way he can sign a waiver electing not to participate in the SEP retroactive to 2006 when he thought he was an independent contractor?

QPA, QKA

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I can't answer your question, but I would ask the following questions: Is there an important business reason to your client to continue to treat this individual as an IC (or more than one reason)? Does the associate wish to be treated as an IC? (He may be socking away $42k per year into his own DC plan as a sole proprietor with no employees.) Do they have a written agreement between them that might be relevant?

I don't know what type of state auditor you are talking about, but quite often a state agency's determination of employee vs. IC status is made on a knee-jerk basis without any sophisticated analysis. If maintining IC status is important, at least for Federal tax purposes (and that would include SIMPLE eligibility), I would refer the issue to an experienced tax attorney for advice. Generally speaking, and historically, IRS has given physicians a wide berth to be treated as ICs, as opposed to employees, but it depends upon the facts.

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See jpods post. If you would like for the IRS to determine whether or not a worker is considered an employee, submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Agreements and waivers may be helpful, but not for the faint of heart. If you don't do anything else, check out Derrin Watson's book, Who's the Employer (4th Ed), Chapter 3 and Q 3:37.

Also see Rev Ruls. 57-71, 53-84, 61-178. An essential element for "professionals" is the degree of control.

In regard to fixing the problem (if it really exists), see Section 6.10 of Rev. Proc. 2006-27 regarding make-up amounts with reasonable interest.

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