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Old 06-19-2013, 08:44 AM
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Question Transferring an employee from 1099 to W2?

Hi,

I just began working for a company in Massachusetts as the HR manager. The corporate office employs 4 people, all on 1099s. They are wanting me to transfer all of those 1099 employees to full-time W-2 employees.

What are the consequences for doing this? I know it will raise a red flag with the IRS, but what are the tax implications we could encounter with this? Would it be better to wait until 2014? What would the fines/fees associated with this transfer be?

Honestly, these people should not have been on 1099 to begin with, but, I can't change that now.

Please let me know your thoughts.

Thanks

AB



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Old 06-20-2013, 06:19 AM
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Quote:
Originally Posted by Accel2013 View Post
Hi,

#1:I just began working for a company in Massachusetts as the HR manager. The corporate office employs 4 people, all on 1099s. They are wanting me to transfer all of those 1099 employees to full-time W-2 employees.

#2:What are the consequences for doing this? I know it will raise a red flag with the IRS, but what are the tax implications we could encounter with this? Would it be better to wait until 2014? What would the fines/fees associated with this transfer be?Honestly, these people should not have been on 1099 to begin with, but, I can't change that now.



AB
#1:I guess they need to contact their ER, NOT you, also an EE,a HR manager;it is up to the ER. It is beyond the IRS decision; the IRS doesn’t care about if their ER ‘d transfer them to EEs receiving W2s.Howevr, basically, it is critical that business owners correctly determine whether the individuals providing services are EEs or independent contractors. For example, generally, you, as an ER, must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an EE. You do not generally have to withhold or pay any taxes on payments to independent contractors.If you run a business and plan to have people working for you, it is important to properly classify them as either EEs or independent contractors because your decision will have payroll tax implications. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. So, classifying EEs in your business as independent contractors can save your business money a you, as an ER, do not need to pay FICA/Futa/state unemployment taxes for them. Businesses which improperly classify EEs whether intentional or not may be responsible for back employment taxes, state tax withholding, unpaid workers’ compensation and unemployment insurance premiums, and penalties for noncompliance with wage and hour laws. In addition, independent contractors who are misclassified may also be eligible for employer-sponsored health and retirement benefits, including paid time off.


#2:As you can see, misclassifying an EE as an independent contractor can result in costly IRS( andeven for state level) fines and penalties for the ER. Small businesses often run up against IRS auditors by calling their workers independent contractors instead of EEs. The interests of the business owners and the IRS are diametrically opposed: Tire IRS wants to collect employment taxes for as many workers as possible, and the business owner wants to avoid employment taxes. This tends to result in payroll tax problems often requiring the business owner to seek tax relief.Indeed, a small business can save a bundle by not classifying workers as EEs. According to the U.S. Chamber of Commerce, it costs a business 20% to 40% more per worker to treat them as EEs. If the business is audited for any reason, the IRS looks at payments made to independent contractors. The Wall Street Journal reported that QUOTE,” in one six-year period, the IRS performed more than 11,000 audits of companies using independent contractors. The results: 483,000 reclassifications of independent contractors to EE status and $751 million in back taxes and penalties. The IRS is very selective in its enforcement of work classification rules. It picks on small businesses, while major corporations often flout the worker classification rules. Guess you need to talk to your ER who decided to issue them 1099s instead of W2s, OK???



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