Experience Dilligencing Employment Practices - IRS Compliance with 1099s

March 21, 2023

by a searcher from Lousiana State University in Houston, TX, USA

Does anyone have experience dilligencing if companies are appropriately employing staff to comply with IRS and legal guidelines?

I am looking at a company that has almost all 1099s and when I read the IRS guidelines on employment classification, it seems like they should all be W2. However, it also seems like there are a lot of loopholes or gray areas to get around it.

This could be driving inflated margins and lead to potential liabilities down the road. Even if we trade on the purchase price to account for the new costs associated with W2 employees, would there still be liabilities / legal risk from historical employment practices with an asset sale structure?

0 Likes

4 Replies

28 Views

Replies

Reply by a searcher
from Morehouse College in Washington, DC, USA

I would pay close attention to why the employee(s) are###-###-#### There are circumstances where the employee doesn't have an SSN and therefore must be a 1099 which means there hours / work arrangement should be consistent with 1099 requirements. This would be less concerning to me because clearly the employee wants to work and the company is trying to create an arrangement that legally works for both parties. There are other circumstances where an employer opts to make a person a 1099 to save money. This is more of a red flag because if the employee feels that they are being taken advantage of than it doesn't take much for them to voice a concern. This could lead to serious issues for yourself as the business owner. Your question on whether or not you inherit historical liability upon purchase is a great question which I too would want to know the answer. Hopefully you can protect yourself in the purchase agreement but please update us when you get a professional opinion.

Reply by a professional
from Villanova University in West Chester, PA, USA

Yes, we assist with the legal due diligence for employees and other legal matters of the transaction. The limitation of liability would depend on how well drafted the purchase agreement is, and how protective the terms are. A well drafted asset purchase agreement that's generally consistent with market terms will usually have the seller be responsible for all tax liabilities incurred pre-closing. If there's a known potential for liability, you may negotiate to have a certain amount of the purchase price to be held back for any indemnification claims or issues of that nature. The timeline for that hold back is negotiable, but in this situation, you would want it to align with the statute of limitations for the particular red flag matters such as the reclassification of w-9 employees to w-2 employees. I'd be happy to discuss this further.

+2 more replies.

Join the discussion