Business purchased, purchase price paid through payroll

[Belgarath]

Another oddball. Dr. has a practice. A clinic purchases his practice, and hires him or her as an employee. Clinic pays the Dr. large quarterly payments for a year, based on large revenue from Dr.'s former clients. Apparently, this is "run through" payroll, but I have no details of what that means yet.

First, it seems odd that these would go through payroll under any circumstances - seems like they would normally have been 1099 payments to the prior entity. But what I think doesn't matter. Since being "run through" payroll, and plan defines compensation as W-2 wages, wouldn't these be considered for purposes of employer contributions?

[MoJo]

What exactly do you mean "being run through payroll"?  I get "reimbursements" through "payroll" but they aren't considered comp for plan purposes.

[Bird]

I don't think it's that unusual.  There are pros and cons to everything, in this case, the buyer gets to deduct what is effectively a purchase by paying the buyout as wages.  More expensive to the seller to receive ordinary income than to get it as an asset sale, but maybe it's easier and maybe it's all factored in.

Anyway, I think you'd be out on a limb to call it anything but wages.  But there might be - are - ways to keep the seller out of the new plan, assuming there is one, like just excluding him.

[My 2 cents]

1.  So they are paying OASDI taxes on the sale price plus ordinary income taxes?

2.  If the IRS chose to audit this situation, do you think that the IRS would consider the "wages" to be compensation for services rendered and not some kind of sham?  Especially if when all is said and done the taxes wind up lower than they would under the usual approach?  One presumes, for example (supposing the new employer sponsors a 401(k) plan), that there will be an attempt to reduce the immediate taxation through a "salary reduction agreement", also deferring indefinitely taxation of the resulting investments.

[ESOP Guy]

Is it possible the purchase price was paid when the business was sold and this is some kind of bonus or incentive comp paid to the Dr. to incentivize him to help retain his former patients? 

I think you need to get more details. 

I can see where this isn't comp and where it is based on small differences in the details.  I just think you (or us on this board) have enough details to know what it is.  It sounds like you need to talk to someone who can give a better description.  Maybe the client needs to get their attorney to make a ruling.

[Belgarath]

Thanks. I had already asked for more details, so we'll see what is really happening once additional details are communicated.