By Guest Blogger John H. Jones, CPA
What do you do when your client comes to you with a Form 1099-MISC and tells you he was not an independent contractor, but was actually an employee? Or as happened to me last year, the client comes to you with no documentation at all?
In my case, the answer was easy since the client was my youngest son, David. David had worked as an intern for the same company in both 2013 and 2014. In 2013, he received a Form W-2, and there were no differences in his employment in either year. David and I both contacted the company and requested a copy of Form W-2 for 2014.
In the meantime, I looked at the facts and circumstances as they existed in 2014. I asked my son how much he was paid and what records he had of those payments, including paystubs. David indicated that his weekly salary was deposited directly into his accounts and that no taxes had been withheld. I then asked if his duties and responsibilities had changed from 2013 to 2014. He told me that he did the exact same thing both years.
We eventually received a Form 1099-MISC from the company. It was a handwritten copy and sent directly to me (not to my son) in an envelope postmarked March 10, 2015. Now it was time to document all the facts and circumstances in this case so that we could prove to the IRS that David was, in fact, an employee. This is an important distinction because as an employee, the company is obligated to withhold taxes and provide matching contributions to Social Security and Medicare matched.
In order to determine that we were correct in interpreting David’s status as an employee, I decided to complete Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Using Form SS-8 is a great way to decide whether or not your client is an employee. As you answer the various questions on the form, you should be able to establish whether the status of your client is employee or independent contractor. After completing Form SS-8, I was very sure that my son’s status was an employee.
We filed Form SS-8 with the IRS to request a determination of his status. Because it was estimated to take eight to 12 months for a response, we decided to file his 2014 Form 1040 using a substitute W-2.
Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is the form to file as a substitute W-2. The form is fairly straightforward and by using this form we were able to timely file Form 1040 for my son. If the status had been determined to be an independent contractor by the IRS, we would have to file an amended return for that corrected status, but I was confident we would prevail after completing and reviewing Form SS-8.
The point to remember is to inquire about all facts and circumstances to determine a client’s status, and then complete the appropriate forms necessary to correctly file a client’s tax return.
John H. Jones, CPA, is on staff at Knoebel’s Amusement Resort in Elysburg, Pa. He is formerly human resources director and currently serves as accountant of special projects. John worked in public accounting, serving as a tax accountant for several years before moving to Knoebel’s.