Legal Question in Tax Law in Massachusetts

I represent a professional service firm which employed a professional on a full-time basis, under a contract for several years. This professional had brought his own clients to the firm. The professional was paid wages and issued a W-2. The contract provided that the professional would retire from full time services at the end of this year and would be paid for the sale of his clients to the firm starting next year based on a percentage of his clients� collections over a period of time. Per the terms of the contract, this individual is to work part-time as an hourly employee for the purchasing firm following the end of his full-time employment. While working part time for the professional service firm, during which time the professional will continue to receive a W-2 for his part time wages, the professional will also receive, as compensation, a percentage of collections from his clients that he brought in to the professional service firm. I know that this income received from client collections would typically be reported by the firm on a 1099-MISC Form issued to the professional with Box 3, Other Income, checked.

My question is this: may my client (the firm) report the percentage of collections from the professional�s clients on a 1099-MISC Form, Box 3, even if the professional continues to work as a part-time employee and receives a W-2 for his services, since this payment based on a percentage of collections has nothing to do with the professional�s part time service as an employee but it based on collections received by the firm? Is there any statutory authority which addresses this or are there any tax articles of which you are aware that address the reporting of income by a firm which is received by an individual for non-services as well as income paid for services by the firm to the same individual as an employee in the same year?


Asked on 11/20/14, 1:14 pm

1 Answer from Attorneys

Unless the payment is characterized in such a manner that it is not compensation for services performed then the answer is the income should be reported as w-2 wages. However, you stated that the purchase was for your client accounts. Without knowing about your profession and the standards related thereto, I cannot say with any certainty that the payment is in fact a payment for accounts and not service related.

The problem is that if you are working part-time for an hourly wage and servicing the same accounts, the IRS on Audit will require your employer to issue a W-2 and require then to pay social security and FUTA.

You need to sit down with an attorney or a CPA who does business regularly, and provide him with a copy of your sale agreement, retirement agreement and the terms and duties of your part-time employment.

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Answered on 11/20/14, 8:29 pm


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