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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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We are a 501(c)3. We provide residential faith based substance

Customer Question

We are a 501(c)3. We provide residential faith based substance abuse services. Our clients are required to work during their stay to support the selfs. Some students work for an independent call center and are personally paid in the form of spiffs. The owner of the call center writes our corporation a check each week for the total spiff amount and includes a breakdown of client names and amount assigned. We deposit the check into an account and make ledger entries for each students account. At the end of their 12 month program the balance of their account is paid to them on our account.
We do not set their work schedule, manage their work hours, or train them for the call center.
Who is responsible for 1099? The call center who manages the or us?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

PDtax :

Welcome to the site. I will be helping you today.

PDtax :

I believe you are responsible for the 1099's. Here's my thinking in support:

PDtax :

Your 501(c)(3) entity is offering residential substance abuse servicesw, which is your primary purpose. You also have a second business, operating a call center. Your income from this operation is likely UBTI (unrelated business taxable income) and reportable, and tax payable, to IRS each year.

PDtax :

One of your expenses in the call center operation is the cost of labor. The program enrollees are your employees, and should be treated as such. Whether they are independent contractors or employees is a question for another time, but I can recall getting paid at my university as a graduate assistant and adjunct accounting instructor during my time in graduate school with a 1099.

PDtax :

Your 990 can then report the income and expense of the call center operation, with 1099's for the students if their work qualifies. The students work for you. You disburse funds. Your income or loss from the operation is yours.

PDtax :

Thanks for asking your question at Just Answer. Ask any follow up you need, or close out your question by leaving positive feedback. I'm PDtax.

Expert:  taxmanrog replied 1 year ago.

The Expert above has the Tax Exempt Organization's UBTI issue correct. However, the individuals who work the call center are EMPLOYEES, and will require withholding on their earnings.

 

In order to be considered an independent contractor, the individuals have to be self-employed. They have to have some kind of economic risk of loss. They have to hold themselves out to the general public as providing the same types of services that they are doing for the organization. They have to be able to provide their own equipment, they need to be able to hire others to perform their tasks for them, they have to have some kind of economic risk of loss - if it does not work out, they have to have something to lose.In your case, you set their hours, you have them use your equipment, you require them to personally perform the services, during your hours on your premises. They are definitely employees!

 

If you would like to have the IRS determine whether they are independent contractors or employees, you can complete a Form SS-8 and they will make that determination for you. But based on your fact pattern, they are employees.

 

If you go ahead and pay them as independent contractors, and report their earnings on a Form 1099, you, the organization, risk penalties of up to 100% of the withholding that would have otherwise been required to be withheld!

 

So, you need to treat them as employees, and report their earnings on a Form W-2.

 

I hope that answers your question. If you have any more, please feel free to ask away!

Customer: replied 1 year ago.
The income we receive from our students in the call center is deposited in our operations account and reported as UBTI. We are paid a flat rate per manhour. However the call center is not owned by us. The call center is owned by an LLC. They own the license, equipment and software. They are agents and negotiate their lead purchases and agreements with the providers of the products they sell. They manage the students, set their hours and train them. The students are paid a spiff by a check to us and we in turn hold the funds until graduation.

Does this make an difference?
Expert:  PDtax replied 1 year ago.
Hi again from Just Answer. PDtax again.

First, thanks to the other Expert for his assist on clarifying the employee issue. I tried to focus on the fact that you have the reporting responsibility, and not the classification.

The arrangement you have with a third party does not relieve you from the reporting. That party pays you for service, which you are reporting as UBTI. You in turn provide labor and disburse funds to them, with closings at graduation. I assume you are in charge of deciding which students get the jobs, from financial aid or other criteria.

Your insertion in the work, from accepting money from the call canter to choosing which students to paying them from funds received, means the reporting responsibility is yours. It's the way you have established the working arrangement, since you actually pay the students.

I would think you want the tax deductions for all the labor. If the funds are reportable by you as UBTI, the deduction for the student labor would save significant tax costs.

The associated costs with their labor are, I believe, yours. While the call center retains some of the control factors normally associated with the independent contractor/employee test, you have not isolated yourself from the employer/employee relationship. You are paid the funds. To isolate yourself, take a flat rate for rent. since you are being paid for the labor, you are the employer and the reporting burden is yours.

Since more than one Expert has assisted, if you need any further support, please ask for the Expert of your choice by name. Thanks again from Just Answer. I'm PDtax.
Expert:  Lane replied 1 year ago.


I have a different answer.

Although your question asks "Who is responsible for 1099," a different (and potentially more important issue has bubbled to the top.

... your need to properly classify the students in their relationship.


IRS actually provide four alternatives:

An independent contractor
An employee (common-law employee)
A statutory employee
A statutory nonemployee

The critical issue still becomes classifying the student. (what sort of reporting?)

After that, who does the reporting, then, becomes the issue.



IRS does provide SOME criteria for making the decision:

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?


See this: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-(Self-Employed)-or-Employee%3F


What you have here is not unlike employee leasing, where ...

Under Code section 414(n), a leased employee is defined as a person who provides services to a recipient company pursuant to an agreement between the recipient company and your organization, under the primary direction or control of the recipient company

 

In these situations, the recipient company provides benefits (and W-2's).

 

 

 

The most pertinent two statements here, in terms of you managing your own risk are the following:

 

(1) "If you go ahead and pay them as independent contractors, and report their earnings on a Form 1099, you, the organization, risk penalties of up to 100% of the withholding that would have otherwise been required to be withheld!"

 

(2) "If you would like to have the IRS determine whether they are independent contractors or employees, you can complete a Form SS-8 and they will make that determination for you. But based on your fact pattern, they are employees"

 

 



Hopefully, we have provided enough information to let you do the necessary research to make an informed decision.

I THIS professional's opinion, you need to ask these questions of IRS.

I would rate the expert here, who has raised the most salient and pertinent issues for you and that is NOT me.

 

It's the second expert, who has point out some VERY important issues

Lane

 

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Lane
Lane
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986