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Contingent Payments to Employees

Andrew Lee's Profile

Hi-

I'm in the process of structuring a maternity leave agreement with a key employee.  The spirit of agreement is that the maternity leave payments would be contingent on employee staying with company for 6-12 months after return to service.  

In terms of this payment, a 1099 payment is much cleaner than running payment through payroll (w/ withholdings).  Anyone out there with thoughts on whether this raises a red flag?.  

 

thx

Answers

Anonymous
(VP - Fin) |

Don't skip the employer taxes. Pay through payroll.

Anonymous
(Managing Partner) |

I disagree with the other commenter.

If you're paying this person a sum of money to cover a six month leave period, with that payment being contingent on the person returning to work and staying for 6-months, GOOD LUCK in recovering those payments once you've booked it as payroll.

We did one of these under an Agreement to pay 1099 consulting compensation during the 6-month Leave of Absence, where the amount paid would have been converted to a loan if the former EE did not return to work and stay on with us for the prescribed period. Terms for repayment of that loan w/ interest were detailed in the Agreement.

There was a bit of legal cost to set up the Agreement. No need to pay employer taxes so long as you're not actively managing the person on LoA in some way during the Leave period. The person on LoA could certainly attempt to negotiate a bump in compensation to cover their added cost for self employment tax on the 1099 income. Up to you to decide if that's in your interest (to maintain goodwill & encourage the EE to return)

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

In an IRS audit, you will be assessed a penalty. Pay through payroll. The person will still be considered an employee. All of the legal opinions in the wolrd will not help you escape a penalty. This is based on similar experience.

Anonymous
(Managing Partner) |

The question that you're not answering is: Should his LoA person decide not to return to work, or comes back and then decides to leave shortly thereafter, how could his business recover the money paid to this LoA person during the leave?

If that money is paid as wages, it can not be clawed back.

Andrew Lee
Title: Director of Finance
Company: Anonymous
(Director of Finance, Anonymous) |

If this is done through payroll and the contingency is triggered, how is either party made whole?
> employee return gross payments (even though he/she received after-tax payment)
> Company has paid its share of withholdings and other taxes.

This sounds like a lose lose situation.

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