Employer converting employees to self-employed and huge tax hit

[Sunset]

OP - since your wife will be self employed , consider she can open a self-401K both IRA and ROTH types. The max contribution limit is $60K/yr if over the 50 age limit (or is it 55?).

Since a person is self employed, consider the hourly rate should go up to compensate for unpaid vacation/holiday time.

I'm surprised the IRS will allow a company to just declare employees as self employed, it didn't work for Microsoft decades ago. Which is why high-tech contractors often run into the 1.5 yr limit/rule.

[soupcxan]

Yes, this is legal, there's lawyers and accountants involved.


No, she won't be a 1099 contractor, its more complicated than that, but still considered self-employed for tax purposes.


No, DW doesn't have any business expenses she can deduct.


No, her pay is not being adjusted up to compensate for this.


No, she can't opt out of the firm's 401k and use a Solo 401k with it's higher limits and cheaper fund options.


Yes, I think $15k is roughly the tax impact of the change based on this calculator. Run it through with $200k for example and look at the total tax bill when you change the income from employment to self-employed.


https://www.taxact.com/tools/tax-calculator.asp

[Big_Hitter]

how can she be covered by the 401k plan if she isn't an "employee"?

[Al in Ohio]

Quote:

Originally Posted by braumeister This is the part I don't understand. How can they not provide a 1099?

That definitely doesn't sound about right. Any company that hires a consultant who is an LLC has to legally provide them a 1099 at end of year.

[audreyh1]

Quote:

Originally Posted by Big_Hitter how can she be covered by the 401k plan if she isn't an "employee"?

Exactly!

[Texas Proud]

Soup....


Starting to sound a bit 'off'....

Still being in a 401(k), not getting a 1099... neither of these apply to a contractor....

Only employees can be included in a 401(k)... we are talking about new contributions, not old balances left there.... that would indicate employee...

If you hire anybody who is not an employee and pay over $600, you have to send them a 1099.... that would indicate employee....




BUT, maybe they are making all employees 'owners' and it is becoming a partnership or some other kind of legal entity.... but that requires a partnership agreement.... nobody can force you into a partnership....

[Big_Hitter]

I'd like to know what law firm is involved

There are big class action lawsuits against employers treating workers as independent contractors, who the Dept of Labor considered employees, js

reminds me of an Arnold movie - Raw Deal

https://www.dol.gov/whd/workers/misclassification/

[braumeister]

Quote:

Originally Posted by soupcxan No, she won't be a 1099 contractor, its more complicated than that, but still considered self-employed for tax purposes. ... No, she can't opt out of the firm's 401k and use a Solo 401k with it's higher limits and cheaper fund options.

Soup, I really think that if you want serious advice, you'll have to explain at least these two points. "It's more complicated than that" just doesn't cut it.

[pb4uski]

+1 Sounds off.

While it might be that the employer has decided to take the risk of converting employees to independent contractors, as some have said, it is suspicious to begin with and an area that is being scrutinized... but there is not much an employee can do other than file a Form SS8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding but they will likely end up having to look for a new job and risk being black-balled in their industry.

At the end of the day, the employer is taking the risk by classifying her as an independent contractor rather than as an employee.

Her incremental cost should only be 6.2% of the first $118,500 and 1.45% of her total income. If she is an employee with $200,000 ofearnings, her SS and Medicare taxes would be $10,247. If she is self employed, according to this website it would be $20,050, and $10,025 would be deductible on her tax return. So the impact should be less than $10k after factoring in the tax benefit of deducting the employer portion of self employment tax.

Finally, she can't participate in the employer's 401k if she is an independent contractor. Also, since she is an individual and is paid more than $600 a year then a 1099 would be required. Since you seem sure she would not get a 1099, how would the current employer report to the IRS what she earned?

[MooreBonds]

Quote:

Originally Posted by soupcxan No, she won't be a 1099 contractor, its more complicated than that, but still considered self-employed for tax purposes. ... No, DW doesn't have any business expenses she can deduct.

If she is self-employed, then there are several expenses she can legally deduct. For instance, driving to the work location and back to her home office is mileage she can deduct. Speaking of home office, time to assign a bedroom or basement room to be her home office.

Quote:

Originally Posted by soupcxan No, her pay is not being adjusted up to compensate for this.

Are her benefits being changed? Does she get vacation still, or is that being taken away? There are a whole host of reasons to be paid more as a self-employed person, including taxes, vacation time, health insurance, etc.

Quote:

Originally Posted by soupcxan No, she can't opt out of the firm's 401k and use a Solo 401k with it's higher limits and cheaper fund options.

As a SELF-EMPLOYED person, she is her own company. The parent company can't tell her what she can and can't do with her own company's 401k. And I don't see how the "parent company' could ever tell her that she 'cant' opt out of the firm's 401k'.

[Philliefan33]

One of my groups at Megacorp hired independent contractors for specific tasks that were outside of the normal activities of the employees. (In fact, DH filled one of those contractor positions after I left the group, but that's a story for another day).

We had to be very careful that we didn't do things that would classify them as employees in the eyes if the IRS. We could limit the window of working hours because the site was only open to "outsiders" during the core working hours. But we couldn't assign them a company phone, they were not listed in the site phone book, and while they sat at a desk they didn't have keys to lock the drawers.

I think it would be very hard to suddenly characterize employees as independent contractors without radically changing the work environment (or running afoul of IRS rules)

[soupcxan]

Quote:

Originally Posted by Texas Proud BUT, maybe they are making all employees 'owners' and it is becoming a partnership or some other kind of legal entity.... but that requires a partnership agreement.... nobody can force you into a partnership....

Yes - this is it.

[ERD50]

Quote:

Originally Posted by soupcxan ... What would you do? ... Look for a job elsewhere (probably at lower pay, even after the tax consideration)? ...

Yes, take another job at lower total compensation. That'll show 'em!

Not sure how anyone can help you with information that conflicts with what they know, and an 'it's complicated' explanation. Sounds like you need professional help that you can sit down with and provide all the complicated details. Or just suck it up.

-ERD50

[target2019]

They pay her money, but there is no 1099? I am racking my brain and the internet to decipher how it is possible in the U.S.

[target2019]

Quote:

Originally Posted by soupcxan Yes - this is it.

Mystery solved. How many partners?
My first guess is that it is way to pay less to the em-partners, if I can coin a word.

[meierlde]

Quote:

Originally Posted by target2019 Mystery solved. How many partners? My first guess is that it is way to pay less to the em-partners, if I can coin a word.

So they will get K-1s instead and distributions. There is a line on the K-1 for a 1065(partnership return) that states the net self employment income.

[athena53]

Quote:

Originally Posted by Sue J I'm a school crossing guard, working for the local police department. For years, the crossing guards were employees of the police department. They were included in the state pension system with the city paying 14% to the pension, the employee paying 10% and not paying into Social Security. Right before I was hired in 2006 they started hiring certain city employees through a temporary employment agency. <snip> While this is not a W2 vs 1099 situation it does point out how employers look for ways to get out of having direct employees.

This is called a PEO, or Professional Employer Organization. I had a few as clients when I was a consulting actuary. You're still an employee, but not of the company where you go to work every day.

Interesting that the OP's wife is going to be a "partner". I wonder how well that will work and if it will become a trend.

[Big_Hitter]

Quote:

Originally Posted by athena53 This is called a PEO, or Professional Employer Organization. I had a few as clients when I was a consulting actuary. You're still an employee, but not of the company where you go to work every day. Interesting that the OP's wife is going to be a "partner". I wonder how well that will work and if it will become a trend.

yes, administaff, now known as insperity, is a peo

[soupcxan]

They're not directly cutting the new "partners" salaries - your gross pay is the same, but you pay a bunch more tax and you have to pay your own health insurance too (no more company contribution). And yet you're still an employee for retirement purposes so you can't get your own Solo 401k. And all work is done at the office so there's not even mileage to deduct.

[Texas Proud]

Quote:

Originally Posted by soupcxan They're not directly cutting the new "partners" salaries - your gross pay is the same, but you pay a bunch more tax and you have to pay your own health insurance too (no more company contribution). And yet you're still an employee for retirement purposes so you can't get your own Solo 401k. And all work is done at the office so there's not even mileage to deduct.

OK... but that means she has an ownership interest in the partnership.... and should get a share of the profits....


What kind of organization is this Attorneys and accountants do this... but the big ones still have employees...

It is USUALLY a good thing for someone to become a partner and one of these places.... I would just want to make sure it is a LLP so your assets cannot be attached if the company loses a lawsuit....