Partnership sharing employee accounts in an online marketplace.

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Partnership sharing employee accounts in an online Marketplace. Is this an illegal misrepresentation to IRS, Marketplace, and/or Employers?

We are a Partnership of 10 or so people. We complete tasks as Employees in an online Marketplace. The Marketplace requires the use of a Social Security Number (SSN) for each Employee. The Marketplace connects Employees with Employers. Employers deposit money into the Marketplace, which the Marketplace then dispenses to Employees upon completion of tasks.

For various reasons, our partnership chooses to have 2-3 Employees ("high stakes" Employees) who complete tasks; the remaining 7-8 Employees ("low stakes" Employees) do not complete tasks but allow the high stakes Employees to use their Marketplace accounts to complete tasks.

In return for the use of the low stakes Employees' accounts, the low stakes Employees are adequately and fairly compensated. For example, the high stakes (2-3) Employees will complete tasks across up to all 10 accounts. For the purpose of this example, the total amount per account might be $100 U.S. dollars. The total from all accounts in this example would be $1,000 U.S. dollars. The 2-3 high stakes Employees, who completed the tasks, will take 95% of this ($950); the 7-8 low stakes Employees, who did not complete any tasks but allowed the high stakes Employees to use their accounts, will receive 5% of this ($50).

The low stakes Employees on a semi-regular basis will withdraw the earnings from their Marketplace accounts to their own business or personal bank accounts. The low stakes Employees will then transfer the earnings to the Partnership's business bank account. The low stakes Employees are compensated for various reasons including: 1) maintaining a personal or business bank account; 2) withdrawing funds from the Marketplace to their personal or business bank account; 3) transferring funds from their personal or business bank account to the Partnership's business bank account; 4) attending occasional business meetings and otherwise staying "in the loop"; 5) filing a 1065-K form (share of profit from Partnership) from the Partnership with their individual annual Income Tax returns for the profit which they are compensated (approximately 5% of the total Partnership income).

Regarding taxes: The low stakes Employees file with the IRS only the money for which they are compensated from the Partnership. Therefore, the low stakes Employees do not file with the IRS for: 1) the amount of money that the Marketplace attributes to the individual Employee; 2) the amount of money that the Employee withdraws to the individual Employee's business or personal bank account from the Marketplace; 3) the amount of money that the Employee transfers from their personal or business bank account the the Partnership's business bank account; 4) the amount of money that the Employer (in rare cases) might attribute to the Employee by way of the Employee's SSN, when the Employer files their annual tax return with the IRS.

So our question: Are the Employees misrepresenting their tax liability to the Employers, to the Marketplace, and/or to the IRS? And does the Partnership need to be aware of any legal issues, should this be a misrepresentation? We understand that by possibly bending the rules of the Marketplace's participation agreement, that some or all of our partners (Employees) may be suspended from the Marketplace. However, at the end of the day all money garnered from the use of the Marketplace is accounted for, in regard to IRS taxation. Also, all Employees are paid fairly for the work that they perform in the duties of the Marketplace and Partnership. Nonetheless, the Marketplace requires the Employees to provide a SSN.

In certain cases the Marketplace will provide an Employee's SSN to an Employer. (Our Partnership is under the assumption that the Marketplace does not file with the IRS for any of the Employees using the Marketplace.) Our Partnership is under the impression that the Marketplace has specified that the Marketplace will release SSN of Employees to Employers only under certain circumstances. In which case the Employer would then file a 1099 for the Employee. So far none of the Employees (10) have received a 1099 from an Employer on the Marketplace. (The limits to when the Marketplace will disclose an Employee's SSN to an Employer are quite relaxed, and it is unlikely that any of the Employees (10) in the foreseeable future will fall under the limits and thereby be required to receive a 1099. The limits are arbitrarily high: for example, an Employee would have to cross a threshold for money earned from an individual Employer, imagine $100,000 per year from a single Employer (not combined Employers), or so.)

However, are the Employees (10) misrepresenting themselves to the Employers, Marketplace, and/or IRS? (In that, the Employers assume they are paying each Employee $X U.S. dollars when in fact each Employee receives only their allotted percentage of the Partnership's earnings.) And in the case that an Employee were to receive a 1099 from an Employer for an amount different than that which they have claimed as profit from the Partnership, would this cause IRS and/or Federal, State, or Local legal issues?

Thanks!

 

[LdiJ]

Partnership sharing employee accounts in an online Marketplace. Is this an illegal misrepresentation to IRS, Marketplace, and/or Employers?

We are a Partnership of 10 or so people. We complete tasks as Employees in an online Marketplace. The Marketplace requires the use of a Social Security Number (SSN) for each Employee. The Marketplace connects Employees with Employers. Employers deposit money into the Marketplace, which the Marketplace then dispenses to Employees upon completion of tasks.

For various reasons, our partnership chooses to have 2-3 Employees ("high stakes" Employees) who complete tasks; the remaining 7-8 Employees ("low stakes" Employees) do not complete tasks but allow the high stakes Employees to use their Marketplace accounts to complete tasks.

In return for the use of the low stakes Employees' accounts, the low stakes Employees are adequately and fairly compensated. For example, the high stakes (2-3) Employees will complete tasks across up to all 10 accounts; for the purpose of the explanation the total amount per account might be $100 U.S. dollars. The total in this example would be $1,000 U.S. dollars. The 2-3 high stakes Employees, who completed the tasks, will take 95% of this ($950); the 7-8 low stakes Employees, who did not complete any tasks but allowed the high stakes Employees to use their accounts, will receive 5% of this ($50).

The low stakes Employees on a semi-regular basis will withdraw the earnings from their Marketplace accounts to their own business or personal bank accounts. The low stakes Employees will then transfer the earnings to the Partnership's business bank account. The low stakes Employees are compensated for various reasons including: 1) maintaining a personal or business bank account; 2) withdrawing funds from the Marketplace to their personal or business bank account; 3) transferring funds from their personal or business bank account to the Partnership's business bank account; 4) attending occasional business meetings and otherwise staying "in the loop"; 5) filing a 1065-K form (share of profit from Partnership) from the Partnership with their individual annual Income Tax returns for the profit which they are compensated (approximately 5% of the total Partnership income).

Regarding taxes: The low stakes Employees file with the IRS only the money for which they are compensated from the Partnership. Therefore, the low stakes Employees do not file with the IRS for: 1) the amount of money that the Marketplace attributes to the individual Employee; 2) the amount of money that the Employee withdraws to the individual Employee's business or personal bank account from the Marketplace; 3) the amount of money that the Employee transfers from their personal or business bank account the the Partnership's business bank account; 4) the amount of money that the Employer (in rare cases) might attribute to the Employee by way of the Employee's SSN, when the Employer files their annual tax return with the IRS.

So our question: Are the Employees misrepresenting their tax liability to the Employers, to the Marketplace, and/or to the IRS? At the end of the day all money garnered from the use of the Marketplace is accounted for. Also, all Employees are paid fairly for the work that they perform in the duties of the Marketplace and Partnership. Nonetheless, the Marketplace requires the Employees to provide a SSN.

In certain cases the Marketplace will provide an Employee's SSN to an Employer. (Our Partnership is under the assumption that the Marketplace does not file with the IRS for any of the Employees using the Marketplace.) Our Partnership is under the impression that the Marketplace has specified that the Marketplace will release SSN of Employees to Employers only under certain circumstances. In which case the Employer would then file a 1099 for the Employee. So far none of the Employees (10) have received a 1099 from an Employer on the Marketplace. (The limits to when the Marketplace will disclose an Employee's SSN to an Employer are quite relaxed, and it is unlikely that any of the Employees (10) in the foreseeable future will fall under the limits and thereby be required to receive a 1099. The limits are arbitrarily high: for example, an Employee would have to cross a threshold for money earned from an individual Employer, imagine $100,000 per year from a single Employer (not combined Employers), or so.)

However, are the Employees (10) misrepresenting themselves to the Employers, Marketplace, and/or IRS? (In that, the Employers assume they are paying each Employee $X U.S. dollars when in fact each Employee receives only their allotted percentage of the Partnership's earnings.) And in the case that an Employee were to receive a 1099 from an Employer for an amount different than that which they have claimed as profit from the Partnership, would this cause IRS and/or Federal, State, or Local legal issues?

Thanks!

This is an extremely convoluted way of doing business and I do not understand why it is done this way. Its also potentially improper as the income is being earned under an individual's SSN, rather than under the partnership EIN, yet it is treated as though received by the partnership. Quite frankly, none of it makes any sense.

 

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This is an extremely convoluted way of doing business and I do not understand why it is done this way. Its also potentially improper as the income is being earned under an individual's SSN, rather than under the partnership EIN, yet it is treated as though received by the partnership. Quite frankly, none of it makes any sense.

Thank you for your consideration and response!

The Marketplace, as far as we know, does not allow businesses to create accounts. Therefore, our Partnership is unable to sign up for an account with our EIN.

 

[justalayman]

from what I see the partnership is earning nothing. Individuals are "hired" and paid. The "employees" will receive 1099's in their name as they should since the employer is hiring the individual, not the partnership.

 

[data]

from what I see the partnership is earning nothing. Individuals are "hired" and paid. The "employees" will receive 1099's in their name as they should since the employer is hiring the individual, not the partnership.

Hi justalayman
Thank you for your consideration and response!

The Marketplace supplies Employers with Employee SSNs in only very rare cases. As mentioned in the original post an Employer might have to pay an Employee $100,000 in a year before the Marketplace will release the Employee's SSN.

In any case why are the Employees unable to, after being "hired" and paid, turn around and pool their earnings in the form of a partnership? The partnership will then split the earnings according to the partnership's partnership agreement, which is based on which Employees contributed the most work. And then taxes are paid by the Employees based on their earnings from the partnership. Is this a valid assumption?

 

[data]

Another way to approach this is through the following:

The low stakes Employees would hire high stakes Employees to complete tasks on their Marketplace accounts. The low stakes Employees would file with the IRS as having earned all money from the Marketplace. The low stakes Employees would then of course claim that they paid 90-95% of those earnings as consultation fees to the high stakes Employees. Of course in this case the taxation would be: taxed once for 10% yield (90% paid in fees) of the low stakes Employees; and once for the 90% of the high stakes Employees.

 

[justalayman]

The Marketplace supplies Employers with Employee SSNs in only very rare cases. As mentioned in the original post an Employer might have to pay an Employee $100,000 in a year before the Marketplace will release the Employee's SSN.

well, the employer needs to provide a W4 or 1099 to somebody. If a true employee, for any earnings. If an IC, anything over $600 needs to have a 1099 issued for.

In any case why are the Employees unable to, after being "hired" and paid, turn around and pool their earnings in the form of a partnership?

what would be the reason to pay the partnership? The partnership is not earning anything. Nobody is paying the partnership as nobody is hiring the partnership.

The partnership will then split the earnings according to the partnership's partnership agreement, which is based on which Employees contributed the most work.

but the partnership is not involved in the employee situation. The people (employees) are simply gifting the money to the partnership from what I see.

 

[justalayman]

Another way to approach this is through the following:

The low stakes Employees would hire high stakes Employees to complete tasks on their Marketplace accounts. The low stakes Employees would file with the IRS as having earned all money from the Marketplace. The low stakes Employees would then of course claim that they paid 90-95% of those earnings as consultation fees to the high stakes Employees. Of course in this case the taxation would be: taxed once for 10% yield (90% paid in fees) of the low stakes Employees; and once for the 90% of the high stakes Employees.

so now you are saying the low stakes employees are actually employers or clients of the high stakes employees.

 

[data]

Thanks for your responses and consideration thus far!

well, the employer needs to provide a W4 or 1099 to somebody. If a true employee, for any earnings. If an IC, anything over $600 needs to have a 1099 issued for.

According to the Marketplace the law changed in the past year with the IRS. Prior to this past year, the Marketplace (a large enough marketplace to at least heavily consider what their claims are) claims that prior to the IRS change that any Employer paying a total of $600 in a year was thereby required to file as IC, and was thereby given an Employee's SSN.

In the past year or so the Marketplace has come out with new guidelines: their new modus operandi is that they will not give out SSN's of Employees to Employers unless an Employee completes roughly $10,000 to $100,000 per year for a particular Employer, and/or the Employer sends more than X payments to the Employee throughout the year, where X is between 100 and 500. (Please excuse the vagueness of numbers here as it is helpful for the parties to remain anonymous!)

Each of our Employees (and the majority of Employees in this particular Marketplace!) will rarely receive more than $1,000 per Employer throughout a calendar year, although some Employees may encroach upon the lower bound (~$10,000) throughout a relationship with an Employer over a span of a number of years.

what would be the reason to pay the partnership? The partnership is not earning anything. Nobody is paying the partnership as nobody is hiring the partnership.

The partnership is probably to help the Employees sort out their taxes at the end of the year. It also may be helpful in terms of seeing ourselves as a legal entity. A legal entity probably has advantages over each Employee "going it alone."

but the partnership is not involved in the employee situation. The people (employees) are simply gifting the money to the partnership from what I see.

If the people are gifting the partnership money, then afterward the partnership is "gifting" it back to the people as a "salary."

Also, outside of the Marketplace the partnership will sometimes complete tasks with private parties.

so now you are saying the low stakes employees are actually employers or clients of the high stakes employees.

If it makes things simpler, yes, we can say the low stakes Employees are clients of high stakes Employees.

When taxes come due we would all like to pay our share of tax. When the portions of profit are split we all want only the portion that we can claim we worked for. Whatever makes that possible.

Acting as a partnership or corporation seems ideal, especially because we wouldn't have to assume that we are "hiring" each other to complete work, rather than "pooling" our money and redistributing it. However, if acting as a partnership is not plausible, then we will have to assume we are private parties that consult with each other.

So, acting as private parties... Does the following sound plausible?

Low stakes Employee #1 completes 1% of tasks;

"hires" high stakes Employee #2 to complete 99% of #1s tasks;

#1 pays #2 98% of tasks for "consultation", keeping a total of 2%;

#1 claims 100% of tasks on Schedule C;

#1 claims expenditure of 98% of tasks for "consultation fee";

#1 pays income tax on 2%;

#2 (high stakes) claims 98% on Schedule C as a "consultation" fee.

Thanks!

 

[data]

Oops, need to apologize for not double-checking the numbers posted here. After reading up a bit, it is indeed required for Employers to send out 1099s to Employees (ICs) over $600 (and optional below). $20,000 and 200 transactions is for the Marketplace for any Employee, and they will send out a 1099-K for this. The Marketplace therefore will most likely give out the SSN of any Employee to any Employer upon Employer's request.

 

[FlyingRon]

Oops, need to apologize for not double-checking the numbers posted here. After reading up a bit, it is indeed required for Employers to send out 1099s to Employees (ICs) over $600 (and optional below). $20,000 and 200 transactions is for the Marketplace for any Employee, and they will send out a 1099-K for this. The Marketplace therefore will most likely give out the SSN of any Employee to any Employer upon Employer's request.

You need to be more precise in your terms. Justa put quotes around the term employer and employee because INDEPENDENT CONTRACTORS are not employees and the people who contract for their services are not employer.

But in this situation, you're not even an independent contractor. A 1099-K is just an indication that they collected credit card payments on your behalf. What the nature of that collected payment is has to be reflected in the appropriate entities tax filings.

I suspect you may actually be engaging in some fraud here. If the marketplace doesn't want businesses, shilling it behind individual memberships may eventually result in you being banned from that marketplace.

 

[data]

You need to be more precise in your terms. Justa put quotes around the term employer and employee because INDEPENDENT CONTRACTORS are not employees and the people who contract for their services are not employer.

Yes IC is the correct term for it. The Marketplace frequently refers to the relationship in terms close to Employee/Employer. Of course it is IC.

But in this situation, you're not even an independent contractor. A 1099-K is just an indication that they collected credit card payments on your behalf. What the nature of that collected payment is has to be reflected in the appropriate entities tax filings.

So if the Employers send 1099s to our ICs with the IC's name on it, it does not seem fit for the IC to pass those funds through to a partnership or corporation? Just want to be sure.

Yes, actually we are each individually independent contractors. Of course the 1099-K is for the Marketplace as it moves the funds between Employer & IC. It is a Paypal-like relationship, where the Buyer and Seller use Paypal, and Paypal will send a 1099-K to the Seller when the Seller sells $20,000 AND conducts 200 transactions.

I suspect you may actually be engaging in some fraud here. If the marketplace doesn't want businesses, shilling it behind individual memberships may eventually result in you being banned from that marketplace.

The Marketplace desires to have our Partnership's ICs in the Marketplace and so it does not seem that losing a place in the Marketplace needs to be worried over. However, what the ICs seek to understand is how to be represented in a legal context. Such as by a client-employer relationship between low stakes and high stakes IC.

 

[FlyingRon]

Since you're being intentionally vague and not mentioning what marketplace you are talking about, it's hard to answer. But either you are wrong and you are NOT either independent contractors or employees or the Marketplace is issuing the wrong forms. A 1099-K is issued by a payment processor who has transferred money to you. They're not providing the contracting for the labor, just passing money from party A to party B. I'm inclined to believe that someplace referred to as a "marketplace" is NOT contracting with you but merely allowing you to access their venue to deal with the customers.

But since you are being obfuscatory and intentionally using incorrect terminology even after two posters have shown you otherwise, I suggest your "players" get together and pay an attorney rather than hoping that your imagined scheme will somehow be blessed by the advisors here.

 

[data]

-- PM'd

 

[FlyingRon]

I don't respond to PMs generally, but the information you provided changes nothing that I said.

You are NOT independent contractors with regard to the marketplace, they are just the venue. You are independent contractors with respect to the person who put the tasks up and are paying you. The marketplace is just also a payment provider and that's why they issue you 1099-K's. The people who are paying you aren't the marketplace.

Further, the marketplace's agreement that you acknowledged by signing on with them clearly says indivduals. They're free to terminate your ass for violating any of the terms (in fact, it's so weasel worded that they can terminate you for any invented reason).