Dynamex Causing Incorrect W-2 Classifications for Independent Contractors
I have a client who works as a traveling salesman for a well-known manufacturer of athletic shoes and apparel.
He was paid as an independent contractor through 2017.
Beginning in 2018, he was paid through the company’s payroll and issued a W-2 form. My client was unclear about why this was done.
After preparing his 2018 return, it dawned on me that he qualified as a statutory employee under the “traveling and city salesperson” rules.
I filed an amended return, and the IRS responded by requesting a letter from his employer confirming his status as a statutory employee.
His employer refuses to classify him as a statutory employee, provides no reason why, and doesn’t seem at all curious as to the proper tax law classification.
In future years, I plan to file my client’s expenses on Schedule C.
I have read your editorial comments on the Butts case and others.
I have two questions:
In the future, should I enter his W-2 as if he were classified as a statutory employee, which my software will carry to Schedule 1040-C, or should I enter it on Line 1, Page 2, with the expenses on Schedule 1040-C?
If the IRS turns down our 1040-X claim, can we appeal?
Your client has been totally mistreated by his employer. You can likely trace this employer’s knee-jerk reaction and mistreatment of your client to the April 30, 2018, California Supreme Court decision in Dynamex.
First, the fact that your independent contractor client received no warning that he suddenly would be treated as a W-2 worker is unconscionable. Also, the fact that the employer will not study the tax laws that apply to its employee is irresponsible and possibly illegal under the payroll tax laws.
And then to compound your client’s misery, the Tax Cuts and Jobs Act (TCJA) eliminated employee business expense deductions for tax years 2018-2025.
Here’s what we recommend you do:
Treat the client as a statutory employee and report the income and expenses on Schedule C of Form 1040. (Attach a statement with the return explaining what you are doing and why.)
Fight all the way to the tax court if necessary. Your client is a statutory employee by law. Don’t give in to any IRS attempts to reclassify the client as a W-2 employee with no deduction for his business expenses. (If you end up in court, you will win, as explained in Tax Reform Punishes W-2 Employees—Get Even!)
Do all you can to make the employer amend the payroll to treat your client as a statutory employee. This likely will require threats of reporting the improper treatment to the IRS or even involving a class action lawyer.
For your client, the amended payroll will properly refund his employee FICA taxes, which are likely more than $8,000. (For more on why you want the payroll amended, see TCJA Tax Reform Q&A: Does Moving W-2 Income and Employee Business Expenses to Schedule C Increase Taxes?)
In the threat to the employer, see what the IRS has to say about attorney fees in Dealer Got Mad, Sent Customer a Fraudulent 1099 to Get Even.