Forced to be an employee!

Hi June:

I hope this note finds you well.

I consider myself lucky to have found your site on the web -- it seems like a terrific resource.

In all cases, here is my situation. I formed a Limited Liability Company (that is treated as a Schedule C for tax purposes) about two years ago to perform technology consulting services. I have since enjoyed a fair amount of income, expenses and profit through a variety of projects.

One of my newest clients, for a very lucrative project, refuses to pay me on an invoice basis, based on what I consider an irrational fear of becoming responsible for some kind of tax liability by my being reclassified as an employee. I will likely not prevail against this perception without losing the client altogether. Basically, I'm being offered a paycheck/W2, or no contract at all.

So here is my question-- As you can imagine, this is not an ideal situation -- is it better for me to just walk away, or can I fix this somehow on the "back end" on my return at the end of the year or through creative accounting? I am most certainly going to incur unreimbursed expenses for this project (which is located in another state). What options will I have to offset those unreimbursed expenses, along with my other, general business overhead against income received on a W2?

Will the IRS use their W2 to make a case that I am not self-employed after all, and cause all my business expenses to be disallowed?

Can my income by W2 be offset by a loss on my schedule C?

What are your comments?

Best: Tom from Wheeling, WV


Hello Tom,

Yes, your note finds me well. Thank you for asking. I have just returned from several weeks in New York and New Jersey, seeing clients and family. I flew out of an 8 degree Santa Fe and landed in a 59 degree Newark, NJ!

You situation is not unique. Just another example of indies not being taken seriously and/or businesses and their tax advisors not being aware of the tax regs as they apply to indies. If you can deal with not taking this client -- don't. If you must here's the situation:

** You must separate W2 expenses from indie expenses. That includes phone, computer, software, publications -- everything!

** Depending on your tax picture -- high income or no kids or no mortgage -- you will probably lose the deductibility of any expenses against the W2 income.

** If that is your only client and that client takes up much of your time the IRS could very well question your independence.

** Yes, a loss from a your indie business [Schedule C] may be deducted against any other income.

Best regards,
June Walker