1099 IC

[ratherbereading]

The office manager in a plan I administer (profit sharing/3% safe harbor) wants to be become an independent contractor paid via a 1099 instead of a W2 employee.  Nothing in her job would change, just the way she is paid.  I know this would make her no longer an employee, and she would no longer be able to participate in the plan, but not sure how to advise her on the myriad of other things it could affect. She is also the HR person, so I can't refer her to the HR dept. 

[C. B. Zeller]

39 minutes ago, ratherbereading said:

I know this would make her no longer an employee

Not true. There are many other threads on this topic. 

42 minutes ago, ratherbereading said:

not sure how to advise her

Advise her on the topics that you are qualified to advise her on, and advise her to consult an expert on anything else. Someone "advised" her to change how she is being paid after all.

[ESOP Guy]

A person doesn't get to decide if they are an IC or not.   There are objective tests you follow and if the tests say they are an employee they are an employee.  If you treat an employee as an IC there are serious legal issues.  

You need competent legal help on this question.  What I just wrote is a very short summary of what they trained us to know back when I worked for the IRS.  We were taught to look for employees who were treated as IC and if we found them problems for the employer followed.  

[ratherbereading]

22 minutes ago, C. B. Zeller said:

Not true. There are many other threads on this topic. 

Advise her on the topics that you are qualified to advise her on, and advise her to consult an expert on anything else. Someone "advised" her to change how she is being paid after all.

No one advised her to change. She wants to change due to tax reasons, as she puts it.

[ratherbereading]

23 minutes ago, C. B. Zeller said:

Not true. There are many other threads on this topic. 

Advise her on the topics that you are qualified to advise her on, and advise her to consult an expert on anything else. Someone "advised" her to change how she is being paid after all.

All the research I've done indicates that an IC is classified as a non-employee, and the plan document defines wages as W2 wages.

[C. B. Zeller]

33 minutes ago, ratherbereading said:

All the research I've done indicates that an IC is classified as a non-employee, and the plan document defines wages as W2 wages.

I'm willing to bet that your plan document, especially if it's a volume submitter document, excludes from participation "employees classified as independent contractors" (or similar language). This means that the plan does not cover employees who are classified (correctly or not) as independent contractors. This exclusion results from the famous Microsoft decision.

I'm also willing to bet that your plan document doesn't define compensation as the amount reported on the W-2, but as the wages required to be reported on the W-2, a.k.a. information required to be reported under sections 6041, 6051 and 6052. So regardless of whether or not the employer actually provided a W-2 to the employee, if the wages should have been reported on a W-2 (because the person was an employee and not an independent contractor) then it is still plan compensation.

But I think you're missing the point. The issue of employee vs independent contractor status goes well beyond implications to the plan. As ESOP Guy said, you do not just get to decide that someone is an employee or an independent contractor. See this page for starters, especially the section titled "Consequences of Treating an Employee as an Independent Contractor" : https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

[ratherbereading]

22 minutes ago, C. B. Zeller said:

I'm willing to bet that your plan document, especially if it's a volume submitter document, excludes from participation "employees classified as independent contractors" (or similar language). This means that the plan does not cover employees who are classified (correctly or not) as independent contractors. This exclusion results from the famous Microsoft decision.

I'm also willing to bet that your plan document doesn't define compensation as the amount reported on the W-2, but as the wages required to be reported on the W-2, a.k.a. information required to be reported under sections 6041, 6051 and 6052. So regardless of whether or not the employer actually provided a W-2 to the employee, if the wages should have been reported on a W-2 (because the person was an employee and not an independent contractor) then it is still plan compensation.

But I think you're missing the point. The issue of employee vs independent contractor status goes well beyond implications to the plan. As ESOP Guy said, you do not just get to decide that someone is an employee or an independent contractor. See this page for starters, especially the section titled "Consequences of Treating an Employee as an Independent Contractor" : https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

I'm not missing the point, but thank you for the help!

[jpod]

You said "I know this would make her no longer an employee," which is why previous responders reacted the way they did.  You also say you are not missing the point, so fair enough.  I suggest you consider putting some of the concerns expressed here in writing and advise them to confer with a lawyer because if you don't it is likely that you and your firm will be blamed if and when the IRS comes gunning for the employer because of what sounds like a potential gross mischaracterization of this individual as a "non-employee." Also, good advice about checking the plan document.  If it does NOT have the so-called "Microsoft" language then there is even greater risk to you and your firm.

[Lou S.]

4 hours ago, ratherbereading said:

The office manager in a plan I administer (profit sharing/3% safe harbor) wants to be become an independent contractor paid via a 1099 instead of a W2 employee.  Nothing in her job would change, just the way she is paid.  I know this would make her no longer an employee, and she would no longer be able to participate in the plan, but not sure how to advise her on the myriad of other things it could affect. She is also the HR person, so I can't refer her to the HR dept. 

Refer her to the company's employment attorney.

[ratherbereading]

1 hour ago, jpod said:

You said "I know this would make her no longer an employee," which is why previous responders reacted the way they did.  You also say you are not missing the point, so fair enough.  I suggest you consider putting some of the concerns expressed here in writing and advise them to confer with a lawyer because if you don't it is likely that you and your firm will be blamed if and when the IRS comes gunning for the employer because of what sounds like a potential gross mischaracterization of this individual as a "non-employee." Also, good advice about checking the plan document.  If it does NOT have the so-called "Microsoft" language then there is even greater risk to you and your firm.

Yes that is what I ended up doing!

 

[Larry Starr]

I'm going to be more direct than what I see in the prior messages.

1) She is NOT an independent contractor; she is an employee and will continue to be an employee even if they treat her as an IC. (Based on your description of what is being contemplated here).  It isn't even a close call.

2) The problem will NOT be hers, it will be your client's (the business) who is misapplying the law and will be severely penalized for failure to withhold taxes on her payments. The penalties for failure to withhold are draconian. And doesn't matter if the employee actually paid all the taxes that would have been due to the gov't.

3) I tell my client (in this situation) to just tell her no.  There is no reason to pay an outside attorney for an opinion UNLESS the client really thinks this is a good idea and wants to find out if he can do it (I would still tell him NO, he can't, but if he wants to waste his money on an atty....).  It appears the impetus is coming from the employee.  What would the client tell her if she asked for an extra 4 weeks of paid vacation?  NO.  Time to do the same thing here.

[rr_sphr]

Argh...this is their HR professional? She should know better and the fact that she doesn't is an issue too!

[jpod]

Maybe I am giving the Office Manager too much credit, but if she is dreaming of setting up a big, fat DB plan for herself once she is an "independent contractor," this would create a tax risk for her (and not just for her employer).   

[Lou S.]

52 minutes ago, jpod said:

Maybe I am giving the Office Manager too much credit, but if she is dreaming of setting up a big, fat DB plan for herself once she is an "independent contractor," this would create a tax risk for her (and not just for her employer).   

It's more likely she's trying to exclude 20% of her income from taxes on the qualified business deduction but I Larry said it better than I, she sure sounds like  an employee no matter what she wants to be called.

[jpod]

I think we all agree that for tax purposes most likely she would nonetheless be an employee, but that wouldn't necessarily stop her from convincing the employer to go along with the scheme if she thinks it benefits her.  Fair point about the QBI deduction, but only if her FIT savings exceeds the extra she'd have to pay as SE taxes (unless employer is grossing her up for that).    

[ratherbereading]

23 hours ago, jpod said:

Maybe I am giving the Office Manager too much credit, but if she is dreaming of setting up a big, fat DB plan for herself once she is an "independent contractor," this would create a tax risk for her (and not just for her employer).   

No that wasn't her plan at all. 

[ratherbereading]

On ‎8‎/‎26‎/‎2019 at 3:04 PM, Lou S. said:

Refer her to the company's employment attorney.

This is a small company - doctor's office - they don't have an attorney on staff, but I did advise them to contact one.