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Former Employee, now a Independent Contractor?

KCinMadCityKCinMadCity ✭✭
edited August 2010 in General Payroll Topics
Hello Gurus! I hope you can help me with my situation.

We had a CEO for our company who decided to resign. We paid out his severance, vacation, etc through payroll and it will be on his W-2. He will continue to receive company provided health benefits for the next 10 years, so he will receive a W-2 each year.

The CEO has signed an agreement that says he will provide consulting services to our company for a period of 3 years. This will be only as needed, no set hours or times.

Our legal department is telling me that it is ok that this former employee will be
receiving a W-2 AND a 1099 from our company for the next 10 (possible) years.
Their reasoning for classifying him as an IC is this: "The ex-CEO's reduced workload and availability support the independent contractor position. The ex-CEO will also be primarily working from his home, not from our business facilities. Outside of any noncompete issues, he is also available to work for organization and entities besides our company."

I have looked online everywhere and cannot find a case or anything else regarding employees that are switched over to independent contractors. I can find some things such as IRS Publication 1779, but it doesn't address former employees.

Has anyone been in this situation or know of any cases regarding it? The Legal department wants to pay the consulting fees through AP and report on a 1099. I want to make sure our ducks are in a row before the IRS comes knocking. If more details are needed about the actual agreement please let me know and I will post what I can.

I appreciate any help that can be provided.

Thanks!!!

Comments

  • Thanks for your answer David.

    From what I understand the ex-CEO would like to become a board member for a few different companies. I believe he is actively pursuing this, however he is not actually advertising per se.

    I suggested that the former CEO start his own consulting company so that we can pay the company directly (instead of the ex employee) but the Legal & Tax department don't want to move forward with that at least right now...
  • Depends on what he is doing for the company - If it is board member type stuff, then that is 1099. If it is officer type stuff (what he used to do) then it may be employment.

    Otherwise, look at the SS-8 and be honest about what sorts of services he will be providing to the company - if it looks like a continuation of employment, but on a part-time or as needed basis, then it is probably employment - if he is doing research on his own time, incurs other costs (risk of loss) etc. then possibly contract work.

    Perhaps I am missing something here - why does company provided health benefits for the next 10 years result in a W-2?
  • Hi Pat,

    I believe that the ex-CEO will be helping the new CEO if he has any issues or needs help with anything - see below for details.

    If we are providing him with "free" medical benefits for the next 10 years, wouldn't that be taxable "earnings"? In addition to the health beneiffits, he will be receiving LTD insurance coverage, life insurance, and reimbursement for tax preparation and financial planning services.

    Here is the verbage directly from the contract:

    The "Consulting Services" shall mean those consulting services and activities related to the functions that the Executive performed as an employee and director of the Company, as may be reasonably requested by the Company, which shall primarily include continued advice in connection with the transition of the Company's leadership, strategic advice in connection with mergers and acquistions and integration with respect to the Merger Agreement, assistance with litigation involving the Company, questions from the Chief Executive Office and Chief Financial Officer of the Company and such other matters as mutually agreed to between the Company and the Executive. In consideration for the Consulting Services, the Company shall pay the Executive a consulting fee of $250,000 per annum, payable quarterly in arrears on or before the fifth business day of the calendar month immediately following the end of each calendar quarter. The Company shall also reimburse the Executive for all reasonable travel and other business related out-of-pocket expenses incurred by the Executive in performing the Consulting Services in accordance with its then-prevaling policies and procedures for expense reimbursement (which shall include appropriate itemization and substantiation of expenses incurred). For the avoidance of doubt, the Executive shall proved the Consulting Services for a maximum of 400 hours during each year of the Consulting Period."

    Doesn't the repayment of expenses blow the IC classification out of the water?

    Thanks for your help with this. I tried getting them to do the SS-8, but they don't want to do that right now either....grrr....
  • Also some of the other finges will be taxable as wages - excess GTL and the legal benefits. For example.

    This is really starting to look more like non-employee compensation to me. This looks like sort of a board member emeritus sort of thing - paid a retainer to be available for up to 400 hours for advice based on knowledge and experience. If not needed gets paid anyway just for being available but on a non-accountable basis. I'd look to the control issue - about the only control the company has is to decide to call the guy up, ask a question, and expect some sort of answer.

    Expense reimbursement by itself won't blow it out of the water - hey - I have a clause in my engagement letters which allows me to bill for out of pocket expenses - usually I just include them in the price of the tax return, but sometimes if something else is going on, I might bill the client for sending something to a tax agency overnight or other out of pocket costs.
  • Thanks for the discussion guys.

    Regarding the health benefits... The ex-CEO was previously provided health benefits through the company. He paid for the employee portion of the premium through pre-tax payroll deductions out of his regular paycheck (just like all other employees). Since his termination he will still be receiving the health benefits, but he will no longer be made to pay for those premiums. I was under the assumption that the amount of those premiums that the company is now paying for him would be taxable "earnings" to him. Please correct me if this is wrong. (We do not have a self insured medical plan)
  • Expense reimbursement by itself won't blow it out of the water - hey - I have a clause in my engagement letters which allows me to bill for out of pocket expenses - usually I just include them in the price of the tax return, but sometimes if something else is going on, I might bill the client for sending something to a tax agency overnight or other out of pocket costs.

    Patrick is using offensive language! Engagement letters - YUCK. :( I can't stand doing them. I have even put it my review on the questions "What can your supervisor do to help increase your job satisfaction?" AND "What would you like to change about your job?".

    It didn't help, I still have to do them :(
  • It didn't help, I still have to do them

    Isn't there an app for that?

    Are these letters announcing your engagement or announcing your disengagement? If disengagement, who left who at the atar? And shouldn't that person write the letters - if for no other reason than to avoid any poison which might be in the aggrieved party's pen? :twisted:
  • It didn't help, I still have to do them

    Isn't there an app for that? :

    Don't I wish it was that easy!
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