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 […]

The Tax Attic with Jerry Coon

January 28, 2010 // 0 Comments

  What to do if errors on your W-2 or 1099 Since deer season is over, the Lions are mercifully finished for the year, I’m too busy to go ice fishing, NASCAR doesn’t start until Daytona next month, and why watch golf without Tiger, I will get my cup of Herman’s Boy Pantlind Blend coffee and write an article for this week’s Squire. A few weeks ago, I wrote about not receiving a W-2 or 1099. This week, I will expand on what happens if the W-2 or 1099 is received, but it is incorrect or is the wrong form altogether. Do you have any recourse if the W-2 or 1099 has the wrong information on it when you receive it? Yes, you do. Remember that the original set of forms doesn’t have to be sent in to the appropriate agency, either the Social Security Administration or the Internal Revenue Service, until February 28. Since you normally receive the form in January, the employer has plenty of time to correct administrative errors such as an incorrect street address or wrong zip code. Those types of errors are easy to correct and most employers are quite accommodating. However, what can you do if the error is of the dollar amount variety, i.e. gross wages is wrong or the federal or state withholding is wrong? Can these errors be fixed? These errors are a horse of a different color. In the federal payroll reporting system within which all employers operate, the dollar amounts that are summarized on your W-2 have been reported quarterly to the Internal Revenue Service. The amounts withheld from your paycheck for federal withholding, Social Security, and Medicare taxes have been paid over to the IRS throughout the year. When you receive your W-2, it is a summary of the activity that occurred under your Social Security number throughout the entire year. If you believe there is an error in the gross wages reported or in the amount of federal tax withheld from your wages and you are correct, this can be a total nightmare for the employer. The company has already paid in the amounts withheld from your checks as well as the amounts it had to match for Social Security and Medicare […]