Employee advance uncollectible

[BHoffman]

One of my more brilliant clients (C-Corp) paid an employee $2500 advance for his moving expenses.  He got there, worked one day, and they fired him.  They want to know whether they can issue a 1099M to him for the advance.  I believe employee advances are run through payroll.  Is that correct? 

I'm wondering if they can deem the amount uncollectible in 2017 and issue him a net zero payroll check that will wipe out the advance in this 2017 year rather than go back to 2016 and have to amend the returns, pay late deposit penalties, etc?

If they can't issue a 1099M and can't run the amount through payroll, how else to get the advance off the books?

Thanks

[Elrod]

I have had this happen several times over the years, B

I would simply do the 1099 for 2016, providing the payment was made in 2016.

Even if it was an advanced payment, hinged on employment,  under the circumstances when the individual  is gone, the only alternative is a 1099.

[Medlin Software, Dennis]

I OFTEN get asked how an employer should handle an advance.  I say don't.  (Note, some localities do not allow an employer to deduct items, even an advance, even if the employee agrees.)

Separation is one issue.  Legally collecting even while employed is another.  In most cases, unless there is interest and repayment terms, it is simply pay, and needs to be taxed at time of disbursement.  (Tag agencies frown on money going out untaxed, caused, facilitated, or because of employment.)

I would not suggest an employer 1099 it.  It was because of employment, it is wages.  The employer needs to pay their part of the taxes, and issue a proper W2 (and amend the quarterlies probably).

[BHoffman]

Pub 535 addresses business bad debt and mentions uncollectible loans to employees.  That's the route I want to take.

From Pub 535:  

"...Types of Business Bad Debts

 

Business bad debts may result from the following.

Loans to clients and suppliers.   If you loan money to a client, supplier, employee, or distributor for a business reason and you’re unable to collect the loan after attempting to do so, you have a business bad debt...."

[Medlin Software, Dennis]

Probably was not a loan for a "business reason", unless it was a documented (terms, interest, etc.) item done outside of payroll.  The key, to me, is no terms and no interest, then it is taxable wages.

Also in 535 "If the employee doesn't repay the loan, treat it as income to the employee."  To which I say income to an employee is W2, not 1099.

[Elrod]

Employee for one day  and I assume paid for that one day- ie-w/2   Anything else..???

Publication 535.....Loans or Advances:  You generally can deduct as wages an advance you make to an employee for services performed if you don't expect the employee to repay the advance. However, if the employee performs no services, treat the amount you advanced as a loan. If the employee doesn't repay the loan, treat it as income to the employee.

Publication 17.... Nonemployee compensation:   If you aren’t an employee and the fees for your services from a single payer in the course of the payer's trade or business total $600 or more for the year, the payer should send you a Form 1099-MISC. You may need to report your fees as self-employment income. 

[BHoffman]

No W2.  They gave the guy a regular check for the one day, around $200 and did not include it in payroll.    The advance was $2500.

[Medlin Software, Dennis]

17 minutes ago, BHoffman said:

No W2.  They gave the guy a regular check for the one day, around $200 and did not include it in payroll.    The advance was $2500.

I might be free for one day at $2700... and I will do the best job I can, so no need to bother firing me after.

If the amount was for moving expenses, it was for an employee.  I can see no way to say the person was not en employee, as it makes no sense to pay an IC's moving expenses.  How the company treated the employee, such as paying by "regular" check does not change the facts as presented in the OP.

[BHoffman]

Dear Medlin:

 

[Medlin Software, Dennis]

Making sense... good one.  I actually get grief for making sense and giving accurate information.  Some only want me to give them the answer they want, which I just cannot find it within me to do.  Such is life.  Thank goodness my greyhounds don't care!  Coincidence.  One today was from an owner/employee who was asking how not to give themselves a paycheck, yet they wanted a W2.  Needs a report like an employee, is an employee, needs to get a paycheck for all time worked, at least minimum wage, at least as often as required by their state, and if an owner, must be what the IRS will accept as a "reasonable" wage.  I got a nasty gram back for not answering how to do what they want to do.

[Catherine]

1 minute ago, Medlin Software said:

I actually get grief for making sense and giving accurate information.

That's endemic in this job, Medlin.  We sympathize!

[Medlin Software, Dennis]

For me, it is soon to be 24 years...  Still have not seen or heard "it all".  Learned plenty though.  Some I can share.  Oldest son has a job installing/repairing a certain thing.  When installed/repaired, they tell their clients not to do a certain SIMPLE thing.  They do not listen, and have to pay for late night and holiday repairs.  Son said something about people not listening.  I pointed out those people had money they want to give to him, so smile, give the advice again, and cash the checks (and get those checks up front).  Happy customer, happy wallet for son, win-win.

[Lee B]

Based on my experience, Medlin is correct.

Not a loan, not a 1099.

Most likely W - 2 Wages.

[ILLMAS]

Please read this when you cannot sleep:  http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/Post.aspx?List=c020aee5-48ad-47b2-8295-a4cf71ba9e34&ID=94

[BHoffman]

At least they haven't mailed the 4th quarter/annual payroll forms yet, so the only thing will be a penalty for late 941 deposit.  Thanks everyone for your advice

[DANRVAN]

16 hours ago, cbslee said:

Based on my experience, Medlin is correct.

Not a loan, not a 1099.

Most likely W - 2 Wages.

I agree, advances for future services are wages, taxable in the year received,  see Rev. Ruling 68-239, Letter Ruling 200040004, and tax court case of Beaver Anson.

[Catherine]

17 hours ago, Medlin Software said:

I pointed out those people had money they want to give to him, so smile, give the advice again, and cash the checks (and get those checks up front).  Happy customer, happy wallet for son, win-win.

The trick is to learn to see those folks, *not* as problem clients, but rather as "walking annuities".  Easier said than done!

[Abby Normal]

If you receive a reimbursement for your moving expenses, how you report this amount and your expenses depends on whether the reimbursement is paid to you under an accountable plan or a nonaccountable plan.

https://www.irs.gov/publications/p521/ar02.html#en_US_2016_publink1000203512

 

[DANRVAN]

6 hours ago, Abby Normal said:

If you receive a reimbursement for your moving expenses, how you report this amount and your expenses depends on whether the reimbursement is paid to you under an accountable plan or a nonaccountable plan.

https://www.irs.gov/publications/p521/ar02.html#en_US_2016_publink1000203512

 

I got the impression that this was an advance to help cover his moving expenses and not a reimbursement, and therefore taxable as wages per Rev. Ruling 68-239.