It's not an uncommon story, though. You've probably heard it, too. More frequently than you'd like. At the end of this story, I'm going to give you the lines to use next time you are faced with a call like this.
Sit back and enjoy.
(Note: All names are made up - for obvious reasons.)
Joe, age 64, has spent the last couple of year working for home installation company ABC doing phone sales, setting up appointments. He's pretty good at his job and loves what he's doing.
He's not on payroll. Bob, the owner of the company wants to keep Joe around and to please him, so he's paying him as an independent contractor - without issuing him a 1099 either.
It seems Joe wants his income to be under the radar because he's collecting Social Security early. Were he to report all his earnings, he'd lose the SS income. Or worse - have to pay it back.
The firm's tax professionals, Top Tax Pros, only prepare the tax returns. ABC has a service that prepares the W-2s and 1099s. Top Tax Pros is assured that all 1099s have been issued. That the difference between total 1099s and total outside service/commissions was either under $600 or going to corporations.
Got the picture?
It's easy to see now....but no one knew about Joe before this one fateful day. Read on.
One day Top Tax Pros actually gets their hands on the detail in the accounts - and learns that Joe is not a corporation, and is not earning some piddly sum. He is earning well over $50,000 per year.
Top Tax Pros sits Bob down to read him the riot act about Joe's compensation. First of all, he should be on payroll. Bob refuses. Says Joe will never accept that. Well, if you don't want to do that, at the very least send him a 1099-Misc.
So Joe got a 1099-MISC with a very large number on it.
Yup. Top Tax Pros got the angry, furious, sputtering and swearing phone call. Bob said you insisted he sends me this 1099. How dare you!?! It's all your fault. You can't do this to me. It's going to cost me my Social Security. And I'm going to have to pay a ton of taxes. Bob can't do this to me.
And those magic words. "I am going to sue!"
When my friend told me that, I just laughed out loud.
Wouldn't that be a great picture?
Can you just see Joe going into court and telling a judge that he wants his just reward!
Listen to the tale from the judge's perspective:
Your Honor, Bob and I have been conspiring to commit Social Security fraud and tax fraud for the last couple of years. Now I have been outed and it's going to be very expensive for me.
Make Bob pay me the taxes I should have been paying all along. Oh yeah, and make Bob pay back the Social Security benefits I've been stealing for the last couple of years.
True, Bob and ABC are going to get hit with taxes, penalties and interest.
What will Joe get?