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1099 Contractor or Leased Employee


austin3515

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What is the difference between an indepenent contractor and a leased employee?

Client called and said that an ee who was formerly a 1099 contractor is now a full-time employee. We're debating whether or not we need to recognize service for eligibilty and vesting under the leased employees rule the way we would, say if the employee first worked for a temp agency.

How do we REALLY know the difference between a leased employee and a 1099-contractor?

I think if:

1) The 1099 employee worked on a "project" for the recipient, they would have been under the primary direction and conrol of the recipient, and they would have been working pursuant to an agreement (i.e., you work and I'll pay). The third requirement (substantially full0time for at least a year) is expressly ignored for purposes of recognizing service. So in this situation, I WOULD recognize service.

2) Now if the employee happened to mow the lawn for the company on the weekends and happens to get hired in some other capacity then clearly, he would be a new hire with no service.

Maybe I'm over-complicating this, and if so, please tell me.

Austin Powers, CPA, QPA, ERPA

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(A) such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the "leasing organization"),

Based on my reading, a leasing organization can be "any other person" - they are just "referred to as" a leasing organization.

(2) Leased employee For purposes of paragraph (1), the term "leased employee" means any person who is not an employee of the recipient and who provides services to the recipient if

(A) such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the "leasing organization"),

(B) such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, and <A name=n_2_C>

© such services are performed under primary direction or control by the recipient.

If you look at just the bolded and focus on those words, I don't see how a 1099 contractor is exonerated from leased employee status.

And here is the paragraph I was referring to regarding recongnizing eligiblity and vesting service:

"In the case of a person who is an employee of the recipient (whether by reason of this subsection or otherwise), for purposes of the requirements listed in paragraph (3), years of service for the recipient shall be determined by taking into account any period for which such employee would have been a leased employee but for the requirements of paragraph (2)(B)." [2B being "substantially full-time for at least a year"]

So these are the complete rules that I know of. How is my 1099 contractor who worked on-site on a project for the empoyer NOT considered a leased employee (except for 2B)? Let's assume that this 1099 contractor provided similar services for other clients, and based on that fact the employer in its judgment correctly concluded that this guy was not a true employee.

Austin Powers, CPA, QPA, ERPA

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My three cents worth...

1¢ As you have concluded, a leasing organization can come in many forms. I once approved an engineer from a consulting firm as a leased employee.

2¢ If the person meets leased employee requirement (2)© then you have to start watching out for the contractor vs employee can of worms (thanks for spoiling that one, Microsoft!).

3¢ The analysis in a case like this sometimes comes down to the three points of the triangle... you, the person, and the third party "leasing organization". I took the hard and fast position that the person could not also be the third party. So that leaves owner-contractors completely out. If the person was obligated by the agreement mentioned in (2)(A), then the person isn't "any other person". Can you identify a proper third party?

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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In order to be a leased employee, the services must be performed under an agreement between the recipient and a leasing organization IRC §414(n)(2)(A). A leasing organization is an organization (such as a "temp agency" or PEO) that contracts with client organizations to provide workers. If the individual receiving the 1099 meets the definition of a leasing organization you have an argument.

PensionPro, CPC, TGPC

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(2) Leased employee For purposes of paragraph (1), the term “leased employee” means any person [Person 1] who is not an employee of the recipient [person 2] and who provides services to the recipient if— http://' target="_blank">(A) such services are provided pursuant to an agreement between the recipient [person 2] and any other person [person 3] (in this subsection referred to as the “leasing organization”),

I reallly really like the argument, a LOT that a third person could be implied. Here is my counter-argument though: The AGREEMENT is between two people - the recipient and ANY other person. Is the 1099 contractor NOT anoither person?? The word "any" has zero limitations, which one must presume was the intention. The words "other than the leased employee himself" would have been required to prevent my intepretation.

Perhaps your counter to my counter (if I may) would be "yes, but Congress could have said "an agreement with any person" (leaving out the word other), in which case everyone would agree with me, I'm sure. They included the word "other." So why add this extra word?

My counter to your counter to my counter would be, couldn't it just as easily be stating an obvious truth, which is that one cannot enter into an agreeement with ones self?

And finally, if it really is this complex, shouldn't small employers just ere on the side of recognizing service if the primary direction and control objective is satisfied?

Austin Powers, CPA, QPA, ERPA

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(2) Leased employee For purposes of paragraph (1), the term “leased employee” means any person [Person 1] who is not an employee of the recipient [person 2] and who provides services to the recipient if— <a href="http://" target="_blank"></a>(A) such services are provided pursuant to an agreement between the recipient [person 2] and any other person [person 3] (in this subsection referred to as the “leasing organization”),

Using your labels.... But you have to read "any other person" in context of the whole thing. Person 1 is already noted as being "any person". If we put "any person" and "any other person" side by side, then it's very hard to say that Person 1 could be Person 3.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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:) Ok, I went and dug up the more definitive answer.

The document here http://www.jct.gov/publications.html?func=...own&id=2512 is the Joint Committee's General Explanation. They explicitly use the word "third person". It starts at pdf page 332, which in the document is numbered 324. And on 334/326 it discusses what constitutes a person for purposes of the provision.

PL97-248 is here http://history.nih.gov/research/downloads/PL97-248.pdf but only provides the enacted code.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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:) Ok, I went and dug up the more definitive answer.

The document here http://www.jct.gov/publications.html?func=...own&id=2512 is the Joint Committee's General Explanation. They explicitly use the word "third person". It starts at pdf page 332, which in the document is numbered 324. And on 334/326 it discusses what constitutes a person for purposes of the provision.

PL97-248 is here http://history.nih.gov/research/downloads/PL97-248.pdf but only provides the enacted code.

Thread killer!

:shades:

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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