Levy on a 1099

I am an owner of a small business, a C Corp, and we received a form

668-W(c): Notice of Levy on Wages, Salary, and Other Income from the IRS. Apparently someone who does work for us, as an independent contractor, has an assessment out against them and the IRS is looking to collect.

From the instructions on the form and the IRS web site, it appears

that I am not obligated to withhold money from the checks I send to this contractor. Can anyone confirm this?

Thanks, G

Reply to
Grip
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Internal Revenue Manual 5.11.5.3 (06-17-2008) Continuous Effect of Levy on Salary and Wages:

"1. Unlike other levies, a levy on a taxpayer's wages and salary has a continuous effect. It attaches to future payments, until the levy is released. Wages and salary include fees, bonuses, commissions, and similar items."

If the checks you send to the contractor are for wages, salary, fees, bonuses, commissions, or similar items, you ARE obligated to comply with the levy on a continuous basis.

Reply to
Paultry

You are definitely required to withhold from anything you owed the worker at the time you received the levy. Without knowing the specifics of how you pay this person, it's impossible to tell exactly what that amount would be.

These levies apply to future earnings of employees, but not those of independent contractors.

I suggest:

  1. Don't make any payments to this person until...
  2. Get with your accountant:

a. Make sure you're on firm ground with the independent contractor treatment.

b. Determine the payment amount(s) in response to the levy.

Reply to
Phil Marti

Thanks. I am confident on the independent contractor point, and understand all the issues thoroughly there.

But I'm not any clearer on my original question since you and the other poster have given me conflicting advice. I suppose it may be time to ask a professional.

G
Reply to
Grip

That makes sense so far.

Ok, that's not necessarily clear. It sounds like what you are saying is:

  1. At the time the notice of levy is received, anything owed at that time to either employees or independent contractors must be withheld and paid to the IRS.
  2. If the IRS isn't satisfied in full, future payments must also be withheld from employees and paid to the IRS.
  3. If no money is owed to an independent contractor at that time, future withholdings are not required with respect to that independent contractor unless another notice of levy is received at a time when money is currently owed.

Do I have that right?

Stu

Reply to
Stuart Bronstein

The IRM excerpt I previously posted mirrors CFR 301.6331, "A levy on salary or wages has continuous effect from the time the levy originally is made until the levy is released pursuant to section 6343. For this purpose, the term salary or wages includes compensation for services paid in the form of fees, commissions, bonuses, and similar items." The reg doesn't differentiate between employee and independent contractor, but defines the character of the payment.

Reply to
Paultry

There's an exemption for a calculated amount of living expenses and some statutory exemptions, e.g., child support, but basically, yes. Whatever is owed the worker at the time of service is the starting point for determining how much to pay over in response to the levy.

Right. The levy on salary or wages is continuous until released or satisfied.

Right, since the continuous property doesn't extend to IC's.

Reply to
Phil Marti

Well, we disagree. The terms employer, salary and wages mean something in their own right, and they don't apply to the payor/IC setting unless there's a specific inclusion, such as in who qualifies for participation in a retirement plan.

Regs are certainly high up in the authority food chain, but they don't trump stat language even if interpreted as you do. My position is based on my experience of trying to get the stat language of 6331(e), which mentions only salary and wages while making the levy continuous, to conform to the language of 6334(d), which provides the weekly exemption from levy on wages, salary or other income.

Note that even under my interpretation there's a possibility of more than one payment to an IC qualifying for attachment from only one notice of levy. It all depends on exactly how the relationship is structured, which is why I'll stick with my original advice to OP. Talk to your accountant.

Reply to
Phil Marti

But I get the impression that this levy was like a bank account levy, applicable to 100% of "property" in custody of the levee (?) , i.e. the person to whom IRS sent the notice, and there is no allowance for exemptions and living expenses as in a wage levy.

ChEAr$, Harlan

Reply to
Harlan Lunsford

Interesting. Section 6331(b) says, "Except as otherwise provided in subsection (e), a levy shall extend only to property possessed and obligations existing at the time thereof."

And 6331(e) says, "The effect of a levy on salary or wages payable to or received by a taxpayer shall be continuous from the date such levy is first made until such levy is released under section 6343."

In sections 3121, 3306 "wages" is defined only to include money earned from "employment."

Without doing more research, what I've seen so far leads me to agree with you. Thanks for the information.

Stu

Reply to
Stuart Bronstein

For the record, it's not my interpretation, but one regularly asserted by the Service, with the backing of District Counsel, during my many years in field collection. I don't have personal knowledge of any case law on this; I can't recall a payer, once confronted with the reg, who wanted to contest the issue. A little research today disclosed this from the US Court of Appeals, Fourth Circuit:

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"(Payer) argues that because (taxpayer) was not its employee, but an independent contractor, any obligation owed to (taxpayer) cannot be considered "salary or wages" under the continuing levy provision. Section 6331 does not contain a definition for either the term "salary" or the term "wages." According to the regulations promulgated by the Secretary of the Treasury, however, the terms include "compensation for services paid in the form of fees, commissions, bonuses, and similar items." Treas.Reg. Sec.

301.6331-2(c) (1994) (emphasis added). It is upon this regulation that the IRS relies.

The IRS contends that its interpretation of 26 U.S.C. Sec.

6331(e) to include the commissions of independent contractors is reasonable. We agree."

The OP hasn't disclosed the nature of the payments to his worker, so we don't know if they represent any of the items of compensation addressed by the reg. I agree with your advice to OP to talk to his accountant, and, further, to a tax attorney, before choosing not to honor the levy. But it appears the Service and some courts don't agree with your position that the continuous nature of the levy does not extend to independent contractors.

Reply to
Paultry

That would be a 668-A. The OP identified his as a 668-W.

Reply to
Paultry

I'm not understanding this completely yet.

Take a case of a contractor who treats his workers as independent contractors. (And no, let's not argue the correctness of that! grin)

Are you saying that if the service uses a form 668-A form, all moneys (like I thought, remember?) due the subcontractor are available for levy? And if they use the form 668-W that the levy is structured just like salaries/wages, i.e. that some allowance for minimum amounts, standard amount plus exemptions, can be subtraced and paid to subcontractor before sending the balance to IRS?

IMTWK.

ChEAr$, Harlan

Reply to
Harlan Lunsford

The distinction is whether or not a levy applies only to what money is owed on the date of the levy, but also moneys that will be owed to him in the future. With an employee the statute states that the employer must keep the levy open and apply future payments to the IRS lien without a further levy notice.

The statutes appears to say that rule does not apply to independent contractors. But the IRS has taken the position that it does.

Does that make it more clear?

Stu

Reply to
Stuart Bronstein

I am not a collection expert. However, I say this: Regardless of his relationship to you, you probably need to withhold something.

Employee: The levy applies. Follow it.

IC: The existence of the levy implies a tax problem - and therefore it may be a good idea to withhold as if "backup withholding" (like when a bogus or no TIN is used) were the appropriate avenue. Granted that this will post the withheld funds to the current year, not the back year, but the point is to do something to cover your own ass. Also note: If the IRS has treated you as an employer, perhaps there's an employee reclassification case out there, so watch out for a 100% employment tax penalty unless you have a satisfactory "section 530 safe harbor."

Reply to
D. Stussy

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Thanks for the cite. It certainly confirms what you're saying. Looks like another case of the left hand (National Office) not knowing what the right hand (the field) is up to.

I fully expected to find something directly mentioning IC's when I went hunting in the IRM and didn't find anything. I'm curious. Did/do you work in the Fourth Circuit? I ask because I recall several instances in which procedures differed by Circuit.

For OP, I join Paultry in saying you should treat the levy as attaching to future payments. You're protected from any claims by the worker by Code section 6332(e). The worker can always file a wrongful levy claim against the US if he thinks you acted improperly.

Reply to
Phil Marti

The problem with this approach is that it won't protect the payor from IRS in a failure to honor levy action, and it won't protect the payor from the worker in a "where's my pay?" action.

Reply to
Phil Marti

You're welcome. No, I never worked in the Fourth Circuit, I spent my entire career in Florida, retired in 2004. I just happened to Google my way to the Fourth Circuit case.

In my experience, the purpose and result of most wage levies was to motivate an uncooperative taxpayer to meet and deal to resolve the issue, thus taking the levy source out of the mix. I'd advise the OP to encourage his worker to do the same.

Reply to
Paultry

Mine too. It was even more effective back in the days when the levy yielded the entire paycheck, albeit one-time only.

It's a shame you never got to see it in action in a community property setting, where it's possible to levy on Wife # 2's paycheck for hubby and Wife # 1's joint liability. I remember one woman who called on a Friday to ask what time the office would be open on Monday. "He'll be waiting for you, if he's still alive."

Reply to
Phil Marti

Well, it looks like I've raised an interesting question...

Since it's come up I can fill in details about the nature of the payments to the IC. I'm not sure what's relevant, but here goes...

We're a broker between businesses and language interpreters. Basically we get calls from hospitals, colleges, lawyers, and corporations who need someone to translate for them on site. We have a list of interpreters we call and offer the work to. The interpreters do the work on site, without direct supervision on our part and are under no obligation to accept work we have to offer.

We pay an hourly rate, no expenses. We pay bi-weekly, using a payroll service (ADP) and the IC in question may have anywhere from $0 to $1000 in a given two-week period.

If there's specific info relevant to this question, I can relate it.

Thanks again,

Reply to
Grip

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