Wednesday, February 18, 2009

Call me whatever you want if you pay my taxes for me

The article in Explore Howard about the umpires is interesting, but it also has me scratching my head as to how a screw up like this could occur. Basically, an individual who worked as an umpire for a county sponsored recreation league part-time lost his or her full-time job and filed for unemployment. This person listed an entity that operates the rec leagues as an employer. An audit of the rec league by the DLLR found that the entity operating the rec leagues had not been paying unemployment tax. This is because the workers were considered contractors by the county, but employees by the DLLR. Faced with $15,000+ in back unemployment taxes, the entity may go bust, which will mean that another organization will take over the rec leagues (or the sports leagues will cease to exist).

McCauley said the umpires in his organization have always considered themselves independent contractors, not employees of the group. He said individual umpires are free to accept or decline any game and are paid on a game-by-game basis.

“No one has ever been fired from umpiring; anyone is free to perform the job, provided they take a training course,” he said.

“I’ve done this for over 30 years,” McCauley said. “I call the game as I see fit, (and) I act as my own boss. …I don’t see us fitting as anything but independent contractor under this criteria.”

But state labor officials said the state now considers the officiating organization to be an employer with employees, not an independent contractor, meaning it has to pay state unemployment insurance taxes.

Alan Kittleman has decided to involve himself, and is introducing new legislation because he does not think that we have enough already. He probably understands very little about the implications of mislabeling a contractor as an employee, or vice versa.

There is one very important question here: were these workers given W-2s or 1099s at the end of the year? I assume that since the DLLR is considering them employees, they were given W-2s.

Here is the problem: these umpires have been avoiding paying Social Security and Medicare taxes by pretending to be employees when they were really contractors. When you are an employee, you get a W-2 at the end of the year which you use to report your income to the IRS. When you are a contractor, you get a 1099. Everyone knows how a W-2 folds into your tax return, and how the employee pays half of SS and half of Medicare, and the employer pays the other half. Yawn.

A 1099 is a bit trickier, because it subjects the contractor to SE tax (self-employment tax, which is the similar to the “employer portion” of FICA and Medicare, but it’s paid directly by the contractor). So in other words, contractors are supposed to directly pay both the employer and employee portion of SS and Medicare taxes. By pretending to be employees, they have stuck the county with the employer portion of their SS and Medicare taxes. The umpires weren’t bitching about being mislabeled as employees someone else was paying their SE tax.

If the sports entity does not have to pay the back unemployment taxes, everyone who has worked as an umpire should have to pay back SE taxes to the IRS. The sports entity should get a refund of SS and Medi tax that they paid on behalf of the contractors. The SE tax is going to be a hell of a lot more in the aggregate than unemployment tax, I guarantee it.

Important Update: word on the street is that the umpires did get 1099s, not W-2s. This fact is supremely important and was not stated at all in the Explore Howard article. This means that the umpires were clearly being paid as contractors, and the DLLR is smoking crack by trying to stick the sports entity with back unemployment taxes when they had no employees. The umpires were not avoiding taxes, the DLLR is being greedy. Umpires: 1; DLLR: 0


Clarksville Karl said...

I have a feeling Senator Kittleman knows a great deal more about the situation than you do. Perhaps you should actually read the bill. As was stated during the bill hearing, we already have exceptions to this law, i.e. paper boys.

Freemarket said...

That really has nothing to do with my point. Furthermore, I seriously doubt that most paper boys are even subject to SS/Medi taxes due to their (typically young) age, and probably don’t even make enough to incur an income tax liability. We are talking about adults here, who are filing for unemployment benefits and potentially shielding income from SE tax.

That said, I certainly hope that Kittleman knows more about the situation than I do. I still have a lot of questions that the newspapers have not answered. Kittleman, otoh, is talking to the parties involved directly.