Payroll Tax Issue

What is the name of your state?WA

We had an employee that was employed with us from 2001 through 2002. In late 2001, he made a sale to a customer, that would be billed out in 3 separate parts.

After he left the company in 2002, early in 2003, the second billing took place for the customer, of which he earned commissions on. Instead of running his commissions thru payroll, we just cut him a check for the amount and then issued him a 2003 1099-MISC for the amount at the end of the year.

The IRS has said that this isn't the correct way to handle it. Even though he wasn't an employee at the time the money was paid to him, we still should have ran it through payroll...to make sure that we pay the proper payroll tax on this amount(FUTA, SUI, & FICA), as well as withhold a portion for FIT.

So, basically they're saying that he should still be considered an employee. Does anyone know where I can research this more?

Why he's classified as an employee even though he wasn't at the time we made the payment to him?

[abezon]

He was a wage employee at the time he earned the right to the commission. That he left the company does not retroactively change the nature of his commission from wages to self-employment. Otherwise, companies would be able to fire workers who had substantial commissions coming in order to save the payroll taxes. You'll need to withhold payroll taxes & withholding from future payments & give him a check for the difference, then issue a W-2 in January.

You should ask the IRS if you can recoup the portion of payroll taxes you should have kept in 2003 from his next check. You may have lost the right to keep anything from future checks to cover the payroll expenses you are stuck with from 2003. (I assume the IRS is making you amend your payroll tax returns & pay the employer portion of payroll taxes.) Be sure to get any answer in writing.