KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE

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comment on W-2 and 1099 / govt asking for your customer list
August 17, 2018
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comment on W-2 and 1099 from August 2, 2018
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Ken,
    I read the inquiry from “name withheld for obvious reasons” in your August 2, 2018 thread. Name Witheld has a ‘great salesman that is employed as a 1099 subcontractor and a full time W-2 employee.’ 
    You correctly advised him that he is not a subcontractor. My question is whether this person even qualifies as a sales affiliate. 
    The IRS only allows a company to issue a 1099 and a w-2 to the same worker when the work performed as a contractor is significantly different than the work performed as an employee. If his receptionist also operates a photography studio and Name Witheld contracts with her to take company pictures for a brochure, that would typically qualify. The IRS would look to see if the receptionist had other customers and did other work in addition to the work for Witheld. The danger here is that this salesperson may be performing tasks that are not significantly different. If the tasks are even remotely similar to the employee’s normal responsibilities, the IRS is going to recharacterize the entire relationship as an employee/employer relationship. 
    Name Witheld has probably gotten away with this in the past because the payee has an different tax ID number, but, if he is audited, the IRS is going to see through this immediately.     
    ‚ÄčIf the ‘contractor’ has his own company, with its own tax id number, is his company properly licensed. If this is happening in a state which requires licensing and the ‘contractor’ is operating under the employer’s license, then the IRS is going to question any other status than employee. Mr. Witheld states that the ‘contractor’ does not have a New York license. If he is unlicensed, I question whether he is truly operating an independent company. The other troubling statement is that the ‘contractor’ instructs customers to “make out the deposit check to his company.” Why would this be necessary. The writer states that there has never been an issue, but how would he know. It is not unusual for a renegade salesperson to represent several different companies and sell the ‘paper’ to the high bidder. How do we know that this isn’t happening here? As a business owner I would be concerned that this is establishing a business relationship between the salesperson and the customer. 
    As I have mentioned many times, the IRS believes that over 60% of employers are misclassifying their employees. Changes to the Tax Code have freed up thousands of IRS auditors to pursue other tax issues, and the IRS has announced that they consider employee misclassification as a hot topic. Properly classifying an employee does not cost much more. The employment taxes must be paid whether by the employer (and the employee through payroll deduction), or by the contractor through self employment taxes. 
    If the IRS catches an employer misclassifying employees, the payments are steep, as much as 100% of the unpaid tax. If your sales person truly is a sales affiliate get Ken’s agreements and document the relationship. If the only service provided is sales of alarm systems then pick one treatment, employee or sales affiliate, and stick with it.
Mitch Reitman
Reitman Consulting Group
Fort Worth, TX
817-698-9999
http://www.reitman.us
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Response
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    Employees sign Employment Agreements. They get W2. Independant Sales Affiliates sign the Independant Sales Affiliate Agreement. They get 1099. Subcontractors you engage to do installation or service get 1099. They sign the Subcontractor agreement. All forms found at www.alarmcontracts.com
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govt asking for your customer list
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Ken
    I am in the process of completing an alarm company business license renewal application. They are requiring the number of active alarm customers we have in their city and a list of those customers’ names, addresses, and phone numbers. Could our customer(s) or the city try to hold us liable for false alarm fees (e.g. our list has an error, we do not receive updated information from the customer to provide the city, etc.)? Shouldn’t the alarm owner/user be the party responsible for registering their alarm and updating their information with the city? 
    Thank you in advance.
Anonymous
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Response
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    There could be various reasons the govt is asking for your customer list information. It's not likely that the reason is to fine the alarm company. It's more likely the govt is interested in enforcing permit requirements, and that is probably targeting customers, not alarm companies. 
    You should inquire why the information is being requested, what the govt intends to do with it and most importantly, how confidential and secure does the govt intend to retain the information. 
    Maybe you'll g
et lucky and the govt will use the info to require every customer to have the alarm inspected annually. 
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
516 747 6700
www.KirschenbaumEsq.com