Retiree being retained as a Consultant

Pixie

Good Morning!

I am seeking the sage advice of the experts!

We have a senior executive that is retiring this year (12/31/04). The President of our company is planning on retaining him as a part time consultant for all of 2005 paying him at the rate of $5,000 per month. He will be paid through accounts payable, therefore, no taxes will be calculated or withheld. If he were to be paid through payroll, he would not be eligible to begin collecting his pension.

I should also mention that this is how our VP of H/R has recommended we handle this issue, stating that this plan is perfectly legal and that we are not placing the company at any type of risk. I, on the other hand believe that if we go through with this, we place the company at great risk, as we will not be paying the employer's portion of statutory taxes for this individual.

I would greatly appreciate if I can be directed as to where to get documentation to show our President that he is being ill advised.

Thank you!

Judith

Will this employee actually meet the definition of a consultant/contractor? The IRS has an easy to follow form to see the criteria as well as the SHRM website for the details. Be careful because it could be a costly mistake.

marc

I would not have a lot of angst over this situation. Given he can meet the contractor definition as suggested by Judith.

Hunter1

There a number of considerations to take into account in deciding whether or not this guy is an independent contractor (do a Google search on the term), and, unless this guy is going to hang up his shingle and provide his services to others as well, he probably doesn't fit the definition. Will he control his own hours and processes, employ help, have the potential for profit or loss, have business insurance, etc? The company is trying to do the guy a favor, but most likely he is going to remain an employee.
That said, if the VP of HR has said that it's OK, and you've raised the issues, you might want to pick other battles.

Dutch2

We have done the same thing with a couple of our retirees. We had our corporate attorneys draw up a contract for them to sign that listed them as consultants for our company for a specific period of time and for a specific rate of pay. They are not paid through our usual employee payroll process, they are paid in a similar fashion as how we pay our Board of Directors. They are not eligible for any of our benefit package.
So far so good.
Good luck,
Dutch2

TN HR

Nothing wrong with this as long as IRS guidelines are met (there's a new short test). I think you still have to 1099 him at the end of the year, however, I'm not positive on this one.

Gene

marc

That's right Gene, the 1099 is a must since taxes are not being withheld.