Strange Call from a Prospect - Employer Paying His Employee's Taxes?

[ETax847]

Today I received a call today from a prospective tax client.  He mentioned how his employer was paying his taxes and paying him in checks that were not included in his W2.  He claimed the employer was paying his taxes on the checks he was receiving and that he did not need to claim the income because his employer was paying the taxes.  Needless to say, I did not agree to help the prospect with his taxes for the upcoming year as I did not think it was correct for him not to claim the income, even if his employer was paying his taxes.

Has anyone ever encountered a situation like this, where the employer was supposedly paying the taxes on the income and issuing checks to the employee without including this on his W2?  If so, how did you handle it?  What benefits would there be to the employer by doing this?

[Ringers]

What is probably happening is that the employer is taking a distribution from the company of money on which he (the employer) has already paid the tax.  Then he is giving it to his employee.  Hence, he is telling the employee that the tax on the money has already been paid (it was taxed as corporate or partnership profit to the shareholders or partners).

In the employer's mind, the tax has been paid and he is treating the check to his employee almost as a gift, which it could be if it were not given in return for any services rendered.

As to why employers would do this, consider that the employer is not paying his share of FICA and Medicare, nor is he paying Fed and State unemployment tax.  Depending on the employer's tax bracket (which could be zero if there is a large amount of deductions or a NOL on his return) he, the employer, could actually be saving money.

 

I do not agree with the employer nor would I take the client unless he reported all of the checks as income.

[ETax847]

Thanks Ringers! That actually makes a lot of sense.  So by the employee not claiming the income, as it is for services rendered, he is essentially committing tax evasion? I'm glad I stayed away from this one.

[Medlin Software, Dennis]

It is a "lose" only situation.  If the employee comes clean and pays their share of taxes, the employer will eventually maybe get caught, and even if not, the employee will probably lose their job.  Been there in my naive youth as the employee.

[taxxcpa]

The employer probably gives his employee the "tax-free" money and hopes the employee won't report it on his return.  If it is a cash business the employer receives money that he does not report and pays the employee from these funds.

 

[kcjenkins]

I agree, and it's why the best you can do is to decline the return.  If you do it right, he'll probably lose his job.  If you do it any other way you become part of the scam.   If you explain it to him, and he wants to file it correctly, that is ok to do it, because it's his decision and his risk.