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Sole proprietor using payroll service for a W2 vs 1099 income

FTPhil
Level 3

I am a sole proprietor financial advisor and tax preparer... I know I know I'm taking away accountants business... That aside, I am trying to determine if there would be any benefit to me using a payroll service to pay myself via W-2 vs just using the 1099 that I get from my Broker Dealer. Basic #'s I earn now via 1099 $200,000, the Tax business brings in $20,000 (Mainly helping my financial clients).

Would there be any benefit to me to use the payroll service for my 1099 income and keep the tax income as business/Schedule C income, and or put all of the income through the payroll service?

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19 Comments 19
qbteachmt
Level 15

You really should already know these things. That's your profession.

"if there would be any benefit to me using a payroll service to pay myself via W-2 vs just using the 1099 that I get from my Broker Dealer"

W-2 = Employee of that entity.

1099 = Contractor to that entity, running your own business.

You cannot pay Yourself through Payroll using W2, as a Sole Proprietorship. I got confused understanding who you feel Employs you, in this discussion.

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FTPhil
Level 3

If you weren't so bent up on being a rude person, "You really should already know these things. That's your profession.", you would realize that you can "Hire" someone to do payroll , and you CAN pay yourself through that same payroll company.

Anybody out there that actually understands what I am trying to figure out here please reply. RUDE people NEED NOT REPLY!

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sjrcpa
Level 15

A Sole proprietor cannot be an employee of his sole proprietorship. (not withstanding that a payroll company will let you do this).


Ex-AllStar
qbteachmt
Level 15

There's no reason to assume I was being rude; it was Concern for you. I'm concerned that, given you told us your profession, you didn't know this. So, of course I and others here are willing to Help. That's what we do. I teach this. I teach this to business people, such as you would take my class. So, Calm Down.

It isn't an issue of hiring someone to do payroll. Here's what you seem to be asking:

First, 1099 is Not Income. It is the reporting of business payments from one business to another for professional services (for NEC) when the amount reaches at least $600. That means you can even make $2 million as a Sole Prop and as long as the people paying you either are paying for Personal work (not a business-to-business relationship) or they each pay under $600, you would never get a 1099 from anyone. Your Income is not the 1099. It's the Income you actually get from your business activity.

Second, you asked if You should be paid via W-2 and I was confused and commented on this. Are you asking about being paid by some Broker that you work under? Because now you would need to learn about Worker Classification. We cannot tell you if you are Misclassified.

You indicate you are running your own business. You can be an Employee for someone, and still have other clients that you work With (not For) as your independent business. Your own Sole Prop entity cannot pay you through payroll and W2 by law.

Hope that helps.

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qbteachmt
Level 15

One thing I encourage professionals, such as yourself, to do is Sign Up for governmental e-newsletters. This came in yesterday:

Worker Classification Webinar

The Tax Exempt and Government Entities Division would like to invite you to register to watch the free Worker Classification Webinar on October 7, 2020 at 1:00 p.m. (ET).

 

This webinar is designed to help government and private sector entities understand the definition of an employee and determine whether a worker is an employee or independent contractor. It will also cover Form SS-8, Classification Settlement Agreements and what to do if an individual is an employee.

 

Questions emailed to: [email address removed]  with the subject line “Pre-submitted questions for the Workers Classification webinar (October 7)” will be answered as time permits.

For further details, see Webinars for Tax Exempt & Government Entities.

 

Sign up here for all categories that are of interest to you:

 

https://service.govdelivery.com/accounts/USIRS/subscriber/new

 

 

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FTPhil
Level 3

I understand that, "Your own Sole Prop entity cannot pay you through payroll and W2 by law."  I can however "hire" or "Pay" a company such as ADP to do this for me. I am NOT "Paying" or giving "Myself" a W2, ADP would be.

I have asked ADP and a couple of others if this was possible as a sole proprietor, and they ALL say yes, just pay them the money and give them the links to the accounts. They withhold taxes and pay me - granted from my own account to another of my own accounts, but it is run through them, who if I needed it, I could get health insurance and a SEP IRA going etc.

That being said, would there be any "Benefit" tax wise to run it this way? Most likely, I would run the FA biz through the payroll Co. and the Tax Biz as business income/ Scd C.

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qbteachmt
Level 15

If you really want to learn and understand this, you should pay attention to what we are explaining.

"I can however "hire" or "Pay" a company such as ADP to do this for me. I am NOT "Paying" or giving "Myself" a W2, ADP would be."

You are confusing being the Employee of someone, and having that Employer's Payroll Outsourced.

"I have asked ADP and a couple of others if this was possible as a sole proprietor, and they ALL say yes, just pay them the money and give them the links to the accounts."

They do not know you have this Wrong and are trying to get your business as a customer. I have caught ADP and other payroll services providers making many errors.

"They withhold taxes and pay me - granted from my own account to another of my own accounts, but it is run through them, who if I needed it, I could get health insurance and a SEP IRA going etc."

But all of that stuff doesn't even rely on you getting Payroll. Your Sole Prop as an employer cannot hire You; you can hire others, but you are You, already. That's the definition of Sole Prop entity.

You can get health insurance a number of ways, right now, and it goes to the 1040, and except for SE, you might even get fully credited for the premiums, essentially removing the business Net Income from the 1040.

You can establish a number of different retirement plans, such as right now, you could establish an SEP and a ROTH, as well. The Sched C would be used for the SEP amount, and the Roth would be allowed up to the limits for you, the tax year, the earned income, etc.

"That being said, would there be any "Benefit" tax wise to run it this way? Most likely, I would run the FA biz through the payroll Co. and the Tax Biz as business income/ Scd C."

Again, what is FA? What is Tax Biz? Who do you work for, other than Yourself?

It's a discussion. We need details.

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Accountant-Man
Level 12

Wrong still. ADP is not the employer, you are. A SOLE PROPRIETOR CANNOT PAY HIMSELF VIA W2.

** I'm still a champion... of the world! Even without The Lounge.
qbteachmt
Level 15

If you perform Financial Advisor services through ADP by being Hired by ADP, ADP would then pay you through payroll as their Employee.

If, on the other hand, ADP contracts with your business to have you consult with them and/or their staff as a Benefit to inform their employees, you sign a contract and get paid as an Independent business providing services to ADP, who is your Client. And you get paid Independently, as a Business to Business relationship. And if that is $600 or more, ADP will report that to the IRS and you through the use of a 1099-NEC form. That way, the IRS has been given notice to expect a Business Return from you when you file your own tax return. And you would report Gross Income; if ADP is not the only customer, then you would be reporting All income, not just that 1099-NEC.

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qbteachmt
Level 15

Oh, sorry; I forgot this one:

If a Broker oversees your work and gives you work assignments, you would be their employee. They send you to ADP. Your broker, the employer, can also have hired me or ADP to "run payroll" but the Broker still is your Employer.

Many variations, that all depend on Who You Work For. Do you work for yourself?

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Accountant-Man
Level 12

I am not an expert(caveat). If this is referring to ADP as a Professional employer organization(PEO), then the question becomes "can I avoid being an employer if I use a PEO?"

I would question the avoidance by the company(you) of being classified as an employer, since sole proprietor's may not pay themselves wages.

This PEO told you yes, because THAT'S THEIR JOB, and that's how they make money. I would not take income tax advice from a payroll company, any more than taking income tax advice from a financial planner.

"A professional employer organization (PEO) is an outsourcing firm that provides services to small and medium sized businesses (SMBs). ... Through co-employment, the PEO becomes the employer of record for tax purposes through filing payroll taxes under its own tax identification numbers." Wikipedia
 
** I'm still a champion... of the world! Even without The Lounge.
IRonMaN
Level 15

Sorry, I heard the word RUDE being shouted and thought someone was calling me.  But as long as I am here, I think the whole issue can be cleared up by listening to a simple little rock tune by some band called the Rolling Stones - "You Can't Always Get What You Want".


Slava Ukraini!
qbteachmt
Level 15

Oh, good point.

It is more than semantics. The Relationship matters. "Who" pays is not "whoever does payroll literally paid me." It's the Relationship that matters. That's why I keep asking about Employers, and who is considered to be working for whom.

An Example of PEO is a local "Labor-Ready Temp Placement Agency" so if you applied to Your own business through this entity, I suppose you can be paid through payroll, and then your business would be charged for their placement service. Then, the IRS would discover this relationship is Invalid, of course.

It isn't clear if there is a desire to form a Corporation? Then you would be hiring yourself, even though you might also be the only Shareholder.

No, there's not much advantage to that. Yes, there are new Costs associated.

And this is Important. If a person has been doing tax returns, this is part of basic business return information. So we want to make sure you get this right, because it is something you should already be using for your own clients. That's the Concern. Let us help you get this knowledge now.

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prkwork
Level 4

To this same subject: I have a prospective client who is a sole proprietor. He got himself and EIN and had ADP pay him salary, but he did not establish any legal entity much less to file it as an S-Corp or C-Corp. Of course, paying himself salary is improper. This has been going on several years.

My question is this: Could I file a 1040 for him by just reporting his true income (all that he has received) on Schedule C, ignore the "salary", show the FIT withholdings as payments to the IRS, and show SocSec and Medicare withholdings as applied to reduce payment of SETax? And how would I show these reductions to payment of SETax so that the Social Security and Medicare funds would receive their reductions?

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Accountant-Man
Level 12

FTPhil, you , as a sole proprietor, cannot receive a W2 FROM YOURSELF. It doesn't matter who prepares it, it is still coming from YOURSELF.

Perhaps you should stick to giving financial advice and stop trying to do accounting work. He who hires himself as accountant has a fool for a client.

** I'm still a champion... of the world! Even without The Lounge.
qbteachmt
Level 15

The additional input here is in a topic that is nearly 2 years dead. However, nothing about this part of the tax or employment provisions is changed.

If someone "ran payroll" or had it done for them, and treated the Sole Proprietor as if they are on payroll as an employee, then it all needs to be rolled back. There is no Payroll payment for that Sole Proprietor.

You can have a payment firm make payments to you. You can have them send in money on your behalf. What matters here is what it was called, how it was reported, where it was sent, what is was supposed to be covering.

A Sole Proprietor is not their own employee. There is no FIT, no withholding, Social Security, Medicare, or Unemployment that reported on W2, 941/944 or 940.

A Sole Proprietor, depending on their complete financial picture, might need to send in 1040-Est, or "quarterly estimates" as it is referred to. That is against their 1040, and their Sched C contributes to that picture. Or, they might have a working spouse with a high enough FIT withheld that the Sched C estimates are already in the computation for estimates paid in.

The amount(s) they take from their firm are not Payroll and are not even a taxable event. They draw from the firms funds, because they are the Owner and these are their funds.

Someone being paid through payroll as payroll with all payroll reporting and filings, needs to stop it. It all needs to be reversed, file amended forms, request refunds, etc. Each case needs to be examined for what it is, how long it happened, when it happened, etc.

No, you cannot try to recharacterize payroll payments as personal estimates. What I've successfully done is pointed out when payroll payments got applied to the wrong period (month or quarter or year) and when 940/941 got mixed up, all for the same entity EIN. The IRS was helpful in straightening out that sort of mess. But trying to allocate entity payments under an EIN to personal payments under a SSN is a bit risky for the IRS to accept by phone. If you can get the IRS to do so, you still need to amend payroll reports, issue a W-2c, etc.

Having an EIN is not the problem.

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prkwork
Level 4

I thought I'd explained that I understood the invalidity of this potential client's approach. You just repeated all the underlying reasoning.

What I asked was how to fix it. You indicated that I could not just ignore the "payroll" and proceed to file using true income and somehow applying the withholdings to 1040 categories. You seemed to indicate that the individual would have to work with ADP to reverse the several years of reporting payroll to him. Given the lack of understanding of the situation by the initiator of this thread, I don't imagine that this situation is unique. Do you know if ADP has the willingness and the capability to do a full multi-year reversal?

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qbteachmt
Level 15

"You just repeated all the underlying reasoning."

This is a Public community, and I was responding to your update of a 2 year old topic. First, nothing has changed. Now everyone else can read that fact. You zombied a dead topic. Accountant Man didn't notice this fact of your posting date and responded to the wrong party. We play nice with each other, here.

"What I asked was how to fix it."

Answered: "and proceed to file using true income and somehow applying the withholdings to 1040 categories." is not how you fix anything. It's how you wrongly report Payroll. The Payroll is the problem.

True income has nothing to do with what was run through Payroll. And the Sched C is wrong because the Payroll is in there as Gross Wage expense. There might be other funding mistakes, as well, because this is not only not unusual, it will be typical if they put various personal expenses as employee benefit, or employee reimbursement, or allowances, or whatever they wanted to call it to bury it. Take a look at vehicle, for instance, to see if that was handled right. Surprise! Take a look at Meals. Travel, because lodging should have been actuals, not per diem. Etc.

"You seemed to indicate that the individual would have to work with ADP to reverse the several years of reporting payroll to him. Given the lack of understanding of the situation by the initiator of this thread, I don't imagine that this situation is unique. Do you know if ADP has the willingness and the capability to do a full multi-year reversal?"

Oh, that's different. ADP has waived getting their own money back, when I have caught their errors many times that were to their favor. I doubt they will reverse anything they did, when they did as they were told.

Someone (you?) needs to list out everything that was done wrong, year by year, and address it, year by year, with the Feds and the State (and insurers? Worker Comp? Anything where "employee" wasn't the valid relationship). The "employer" has amended filing to do, and the "employee" has amended filing to do, and this will be when you get to make those boat payments.

Remember, TCJA changed things, so watch for year-to-year differences.

And that's why you should start a new topic, not posting inside a 2-year old topic. It's the same, only different.

Good luck.

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The_AntiTax_Man
Level 7

@prkwork   I would pass on this prospective client.  It's a black hole of your time usage.  Maybe send him to @FTPhil ?