The Tax Attic with Jerry Coon

February 4, 2010 // 0 Comments

What exactly can be done if you receive a 1099-MISC as a subcontractor when you think you should receive a W-2 as an employee? Receiving a 1099-MISC is not always a negative, but as my discussion of last week pointed out, we just have to say the tax implications are immense. But, regardless of the tax consequences, does the Internal Revenue Service have a procedure to follow if you are convinced that you should have received a W-2? The answer is yes. It is a common problem, because it is almost always advantageous to a payer to report payments made to someone as a subcontractor instead of an employee. Why is it more advantageous to call a recipient a subcontractor and not an employee? First, payments to an employee are subject to a matching Social Security and Medicare tax of 7.65%. Payments to a subcontractor are not subject to this 7.65%, so the payer instantly adds 7.65% to his bottom line. Second, payments to an employee are subject to federal and state unemployment tax. The federal unemployment tax rate is normally 0.8% of the first $7,000 of wages, or $56 per person. Since Michigan owes the federal government billions of dollars, there is a 0.3% surcharge, or $21, added for the year of 2009. Michigan unemployment rates are variable, but a new business will pay 2.7% of the first $9,000, or $256. The maximum rate is 11%, so $256 could be very low. Payments to subcontractors are not subject to these two taxes. This adds a few more hundred dollars to the bottom line. Third, payments to subcontractors are not subject to workman’s compensation insurance. For construction employers, that rate of insurance could be as high as $30 per thousand of payroll. Fourth, employees are quite often covered by those items called fringe benefits. They might be covered by health insurance, receive paid vacation and personal time off, receive time-and-a-half pay for hours worked over 40, be paid a premium amount for working on weekends and holidays, receive an automobile as part of their compensation package, and be paid for continuing training, etc., etc. A subcontractor receives none of these benefits. Fifth, the employer might have some type of retirement plan set up. An employee […]