Employer converting employees to self-employed and huge tax hit

[soupcxan]

DW's employer announced they are converting everyone like her from W-2 to self-employed status (not 1099 but essentially the same for tax purposes, and yes apparently this type of reclassification is legal). This will increase our federal tax bill by ~$15k/year because of the added self-employment tax.

What would you do? Make a big deal? Look for a job elsewhere (probably at lower pay, even after the tax consideration)? Say nothing?

 

[nun]

DW's employer announced they are converting everyone like her from W-2 to self-employed status (not 1099 but essentially the same for tax purposes, and yes apparently this type of reclassification is legal). This will increase our federal tax bill by ~$15k/year because of the added self-employment tax.

What would you do? Make a big deal? Look for a job elsewhere (probably at lower pay, even after the tax consideration)? Say nothing?

Unionize

 

[athena53]

It's legal but the IRS frowns upon changes in status that are in name only. Do they tell her when and where to work? Do they provide the desk, computer, etc? This is a complex area and I'm sure not an expert but they better know what they're doing.

 

[meierlde]

Note that 1/2 the self employment tax is deductable from income tax. Also at least consider that health insurance premiums are also fully deductable in this case: https://www.irs.gov/businesses/smal...oyment-tax-social-security-and-medicare-taxes

 

[Big_Hitter]

what type of business?

 

[Senator]

If you do it right, you will pay LESS taxes. Deduct every business deduction you can. Take a large dividend and a small salary. Have them pay you as a LLC or corp. Pay your kids a small salary.

Anyone that thinks a business will pay more in taxes than an individual is smoking crack.

Unionize

Agree. As an employee, a union is a great thing. You can be a slacker and get paid as much as a high performer.

It's legal but the IRS frowns upon changes in status that are in name only. Do they tell her when and where to work? Do they provide the desk, computer, etc? This is a complex area and I'm sure not an expert but they better know what they're doing.

I agree. They probably outsource to a third party, and pay them.

 

[Texas Proud]

It's legal but the IRS frowns upon changes in status that are in name only. Do they tell her when and where to work? Do they provide the desk, computer, etc? This is a complex area and I'm sure not an expert but they better know what they're doing.

It is not always legal....


Also, states have a say in how employees are classified.... when I worked at a small company the state came in to audit our payroll.... looked at everybody who was 'contract'... they said that the wife of one of our employees who would come in every once in awhile to cover the phone (less than once a month) was an employee!!! They did not care what we said.... they said we tell her when to get to work and when she can leave, hence and employee.... cost us a bit in taxes....

Normally we hired from a temp agency, but then they were employees of that agency, not 1099 workers....


IMO, the gvmt needs to crack down on all these employers who are trying to do this... they want to dictate what someone does, how they look, when they work etc. etc. which makes them an employee.... and they need to provide the benefits that employees receive from that company....

 

[bmcgonig]

DW's employer announced they are converting everyone like her from W-2 to self-employed status (not 1099 but essentially the same for tax purposes, and yes apparently this type of reclassification is legal). This will increase our federal tax bill by ~$15k/year because of the added self-employment tax.

What would you do? Make a big deal? Look for a job elsewhere (probably at lower pay, even after the tax consideration)? Say nothing?

Are you sure it not half of 15k? You'll now be paying the employer half of SS and Medicare. SS limit ends at 120k or so. That's about 8.5k. You'd be very well paid if you ended up paying another extra 6.5k in Medicare?

 

[perrytime]

how did you come up with 15K a year extra in SE tax? back of the envelope math, I see worst case as about 7% of 125k, or 8750,

 

[marko]

BIL's company did this. It was a smallish company of 65 employees and they believe it was to get around the ACA "50 employees" requirement.

 

[HadEnuff]

I've been reading a lot about this trend in dentistry. Rather than "hiring an associate", the new doc is treated as "independent contractor"...as an employer I never did it this way, but can see the advantages. Not having to pay half of the payroll taxes being an obvious one, as well as not having to pay fringes like vacation, sick days, pension contributions, etc etc.
As an employer, I was always cautioned by my lawyer and accountant that it can get tricky with the IRS, and other labor agencies, state and federal, if indeed, I were to be the only one using the "independent contractor's" services.

Having said that, when I sold my practice, and the new doc wanted my presence to remain on a limited basis, for a limited amount of time, she wanted me to be paid as an IC, and not on her payroll. Her advisors recommended it. My advisors told me that if there were to be a problem, it would be hers, and not mine. It wasn't big bucks, and it facilitated the sale, so I went along.

If it were I, I'd look into Senator's strategy of making lemonade of these lemons. It could work to your benefit.

 

[pjm-7]

As a former employment tax auditor this smells!!! Please speak with a legal and/or tax professional pronto!

 

[braumeister]

not 1099 but essentially the same for tax purposes,

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

 

[HadEnuff]

As a former employment tax auditor this smells!!! Please speak with a legal and/or tax professional pronto!

Did you work for a government agency?

I would love to hear your take on this issue.

 

[Chuckanut]

Most self-employed people I know have more control over their time and get a higher hourly rate to compensate for the benefits they don't earn as an employee.

So, I assume the employer will give all these people more control over their time, and pay them more. Right?

 

[MRG]

It is not always legal....


Also, states have a say in how employees are classified.... when I worked at a small company the state came in to audit our payroll.... looked at everybody who was 'contract'... they said that the wife of one of our employees who would come in every once in awhile to cover the phone (less than once a month) was an employee!!! They did not care what we said.... they said we tell her when to get to work and when she can leave, hence and employee.... cost us a bit in taxes....

Normally we hired from a temp agency, but then they were employees of that agency, not 1099 workers....


IMO, the gvmt needs to crack down on all these employers who are trying to do this... they want to dictate what someone does, how they look, when they work etc. etc. which makes them an employee.... and they need to provide the benefits that employees receive from that company....

This was very common in the lumber industry when I was in it. Nobody wanted to pay the workman's comp for loggers, mill workers....! Surprise! I was treated that way and left for a company that would.

I'd seek legal advice, the IRS was cracking down on the practice as I was leaving. My understanding is that the contractor has to have a significant to say how and when the job was done.

As an aside I recall a "contract" logger (he wasn't) who was seriously hurt by a chainsaw attempting to decapitate him. He didn't file any paperwork, the guy he w*rked for promised to take care of him. You know how that story ended.

 

[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. The crossing guards, fall leaf collection help, summer park employees are the type of employees hired through the temp agency. All my work contact is through the police dept, but the paycheck comes from the temp agency.

It seems that the main reason for the hiring change is that the pension was so expensive and they could save quite a bit by paying the temp agency and the temp agency cost covers the FICA (Soc Sec and Medicare).

This worked out fine for me because the reason I started working as a crossing guard was to earn my last few SS credits.

There are two crossing guards hired before me who are still included in the old system and are still accumulating pension years of service. They will get a benefit when they retire.

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.

 

[someguy]

As someone else pointed out, your number seems high. In terms of SE tax, roughly 8%. Also, you can deduct a lot of things and in many cases you can make up or more than make up that 8% with those. Obviously that is highly dependent on a lot of things including if you rent or own home(s).

Also keep in mind if Trump enacts his proposed tax plan (or something close to it), IC/small business income will be taxed at a flat 15% (I believe Ryan's proposal is at 20%). If that happens, a lot of high income employees will be begging to switch!

One can file IRS form SS8 for an official determination of employee vs. IC.

 

[MichaelB]

Can we please keep politics and election rhetoric out of the conversation?

 

[Big_Hitter]

they may be doing it to get around the new overtime law too

 

[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]

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]

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

Exactly!