determination of employee status

[Catherine]

A client got a letter from the Dept. of Labor.  That agency determined that she was a mis-classified employee in 2014 and should have gotten a w-2 instead of a 1099-misc. 

Will the IRS make adjustments and return to her the overpaid SE tax (employer portions)?  Or will we be required to amend?  If the latter, how do we "prove" to the IRS that she was an employee?  The DOL issued a letter - by email - telling the client of the determination.  

I've never run into this before, and am not sure how much these two agencies talk to each other - or what they do with the shared information.

[ILLMAS]

I am wondering  if the notice is just informational and nothing else to do.  Maybe the employer got busted for treating it's employees as subcontractors, this was very common with temp agencies.

[jklcpa]

I have never dealt with this issue when the DOL made the determination or for an employee that was notified of the reclass. I briefly searched and found this page on the IRS site, 2nd to the last item seems to cover the situation. Check this out and form 8919 too.  This IRS page has similar info too.

[easytax]

All the above are good references and suggestions //// for WHEN  the IRS notifies your client of reclassification.  Until then, the DOL has no status for tax matters. Think of it as if a "court" had ordered something for a divorce, IRS does their own thing!   

Action to take is AFTER IRS notification , anything done before then will simply confuse the issue and make it take longer overall.

By the way, the DOL and IRS do "talk" on matters such as employee reclassification. There is a push on by the DOL for a lot of reclassification due to their broader definition of employee vs ICC. They basically use a financial circumstances definition to ensnare more entities into employee instead of IC.      Reason being (my opinion) easier to collect taxes due from employer than from multiple IT'S.

 

[jklcpa]

Easytax, thanks for pointing out that it was a DOL determination. I know, I know, it was in the original post but by the time I got back to this and answered, I didn't go back to look at Catherine's original post

Sorry, Catherine.  I don't have anything else to add to what Ed posted. 

[BulldogTom]

Personally, I would prepare the amended return to see if there is a refund after changing the status.  If there is, I would file the SS8, including the DOL letter, and then file the amended return showing the SS8 application and the DOL letter.  I would not want the statute to run out on a refund.

If the amended return shows a balance due, I would probably advise the client to file the amended return but leave it up to them to decide.

Tom
Newark, CA

[Catherine]

Both year's amended returns show very small refunds (grand total less than $300, if memory serves - and only on a first pass at them, so subject to change).  With loss of IC status, the expenses go on Sch A/2% and this client used standard deduction.  Expenses don't push into Sch A being useful.  I was kinda hoping the IRS would take care of it so I don't have to charge the client almost as much as the refunds to prepare full-blown 1040X's.  

Thanks to all!  I think we'll hold off a bit and see if the IRS sends anything.  If we hear nothing by, say, end of summer, I'll revisit the issue.

[Cathy]

Catherine,  You are wise to wait this one out.  I would think when you said the "Dept. of Labor", you were talking about the Wage and Hour Division of the U.S. Dept. of Labor?   My father worked as an investigator for them before his death years ago.  I do remember very well the wages and penalties, etc....that the employer would have to pay their employees once they completed their investigation.

The fact that the "contractors" were misclassified as such possibly means that the employees are owed back pay for overtime worked at straight time and/or who knows whatever else.  I can remember my Dad having to carry a gun on an occasion or two as the final totals owed by some of the employers were astronomical.  I was too young at the time to know enough to ask certain questions, but now I assume any correction of wages that will possibly be paid to the employees this year will be reported on their 2017 W-2's.

The agency of the US Dept. of Labor still exists with the same purposes as they had when my dad worked as an investigator as I have called them over the years since his death for their direction on several issues involving different clients.

Take care.

[Jim Oh Bkkr]

I would wait as well.  I had this situation 20 some years ago, and client, (who had good records of payments), received a grossed-up W-2 that included minimal "income tax withholdings".  Gross, less all taxes withheld from W-2, equaled payments received.

[Medlin Software, Dennis]

I would also take the DOL contact as "information" for your client.  It actually infers "rights" as mentioned, OT, min wage, SS deposits, WC, etc.  Do keep in mind if the employer continues to exist and cleans up their mess, the "wages" will likely go up, as a gross up is probably the cleanest for the employer to use, which will increase earnings for your client.

In the end, the increased wages is probably all you will need to worry about, since if your client had issues with what they earned, needed coverage for an injury, etc,. your client would have forced the issue earlier.

Si if needed/desired, do a sample return with the now wages as net, figuring the taxable as grossed up.  The employer "covering" the employee SS and Medicare (and any other state required items) increases taxable for your client.

[Catherine]

Oh boy, this just gets more fun with every post!  My client only worked for these folks for two years; 2013 &n 2014.  I had used a working assumption that a refund for 2013 could still be filed, even after SOL runs out, because of the DOL's overturning of this particular applecart.  I had not even *thought* of issues like gross-up, overtime, etc.  

We'll wait and see what (if anything) the former employer sends my client between now and fall - and what the IRS might send, as well.  In the meantime, keep on posting!  I will be making a nice *long* list of "gotcha's" to be on the lookout for.

Thanks to all, and over this weekend remember all those who gave their lives for this country.