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Thread: Question about W2s and Buying a home

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    Default Question about W2s and Buying a home

    Hello,
    I wanted to ask two questions because I am in the process of buying a home.

    1. I have worked in the same club for the past 2.5 years and have always received a W2. I did not know until i finished my first year that I "should" be considered an independent contractor. Since I received a W2 I did not think anything of it, but now as i am in the home buying process I am wondering, why am i receiving a w2. My club makes me sign a paper whenever I do a "champagne" room or any "funny" money, but I never sign off on any money made by lap dances or cash tips. After my first year I realized that my W2s were calculated roughly off of just the money I signed off on.(FYI a champagne room is $645/hour, which I make 200) My question is; Is this correct in the way my club is doing this because I do not see how I can receive a w2 without being considered an "employee". By the way I do pay a house fee, and I have received a tax refund the past 2 years.

    2. This question is about my house buying process, obviously now entailing my W2s as well. I am buying a house and my loan officer was asking for pay stubs but obviously I do not receive pay stubs so i gave my last W2s. She said this should be find but just wanted to make sure by asking my manager how much I make, but as we know it is sometimes very inconsistent. Is there something I can do towards this?

    thanks!!

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    Default Re: Question about W2s and Buying a home

    1. If you are receiving W2's you are considered to be a 'statutory employee'. As a statutory employee, your legal method of reporting tips, lap dances, and other 'non-hourly' income is to declare it to your employer ... who is then supposed to run it through their payroll system, withhold taxes etc. Since you have not done this in regard to tip and lap dance income ( and indeed the club may not have allowed you to do this ), you are now between a proverbial 'rock and a hard place'.

    Technically speaking, you're not allowed to report tip, lap dance income, and other income earned while working as a 'statutory employee' by any method other than through your employer's payroll system. So if you haven't done this, or if indeed your club would not allow you to do this ( which many won't ... because it would mean that the club would have to make larger SSI / disability insurance / unemployment insurance payments that would be based on your higher reported 'employee' income level ), then you really face two choices with neither being 100% 'legal'. The first is to take the same position as the club that your tip income, lap dance income etc. doesn't exist. Of course, this means that your tip and lap dance income won't exist either for income verification purposes i.e. applying for loans / mortgage. In real world terms, this probably has the lowest probability of triggering an audit since the club's records and your own records will 'jive' with each other ... but it does constitute wilful under-reporting of income.

    The second is to attempt to report your tip and lap dance earnings as if it were 'self-employed' income from a 'different' business. This would involve filing a Schedule C and treating your tip and lap dance earnings from the 'employer' club as if it came from a different club that does not treat its dancers as 'employees'. This would create a 'verifiable income' level that is accurate for loan / mortgage applications. This would have a higher probability of triggering an audit since no second club which does not treat its dancers as 'employees' actually exists ... which technically speaking constitutes fraud.

    IMHO the situation that 'statutory employee' dancers who aren't allowed to report their full incomes through the club's payroll system ( as required by the IRS ) find themselves in amounts to 'damned if you do, damned if you don't'. If the 'employee' dancer doesn't / isn't allowed to report her full income through the club's payroll system, technically speaking no matter what she does from that point forward it will be the dancer who is in the 'wrong'.

    With the recently enacted 'income verification' regulations on mortgage lenders, there's little that can be done after the fact to prove that your earnings were actually higher than those reported by W2 and your personal tax returns for previous years.

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    Default Re: Question about W2s and Buying a home

    Quote Originally Posted by Melonie View Post
    With the recently enacted 'income verification' regulations on mortgage lenders, there's little that can be done after the fact to prove that your earnings were actually higher than those reported by W2 and your personal tax returns for previous years.
    I agree. The only way to change your personal tax returns for prior years is to file amended returns and pay the tax and penalties.

    Z

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    Default Re: Question about W2s and Buying a home

    ^^^ but filing amended personal tax returns for previous years really isn't a 100% legal possibility for a 'statutory employee' ... unless the 'employer' is similarly willing to amend W2's ( and therefore their own previous year tax returns ). An 'employee' dancer filing such amended tax returns unilaterally is highly likely to prompt an IRS investigation of both the 'employee', the 'employer', and potentially other 'employees' working for the same 'employer' ... because, obviously, the greater amount of 'employee' income reported on the 'employee' dancer's amended tax return is going to disagree with the 'employer' issued W2 income amount - the IRS is undoubtedly going to try to find out why there is a disagreement - and the IRS is probably going to revisit the tax returns of the 'employer' who issued the W2.

    Yes it would be possible for a 'statutory employee' dancer to file amended tax returns showing that a 'separate sole proprietor business' earned X amount of tip and lap dance income to 'sidestep' the potential issue of disagreeing W2 income amounts. However, since no real world 'separate sole proprietor business' actually existed, while this is closer to being financially correct it is FAR from being legally correct. Or stated another way, the reporting of income from a non-existant business can also be referred to using terms such as money-laundering and fraud ! I have very little 'feel' for how this might 'play' with the IRS.

    The true problem here is that the 'employer' club is responsible for making social security tax payments, unemployment insurance payments, disability insurance payments, etc. on behalf of all 'employee' dancers that are proportional to the dancers' reported earnings levels. 'Employer' clubs typically try to keep the amount of income reported by 'employee' dancers to a minimum, since this also minimizes the amount of 'employer' SSI, unemployment, disability etc. payments that must be made out of the clubowners' pocket ... which they are able to get away with since, technically speaking, it is the 'employee' dancer who is at fault if 100% of her earnings are not reported to her 'employer'. (Re) opening that Pandora's Box via the filing of amended tax returns can lead to a whole lot of 'complexities', since it not only involves the IRS and state tax agencies, but also potentially involves state unemployment and disability insurance agencies ( all of which are 'broke' and aggressively seeking additional funds ).

    From a real world tax enforcement standpoint, while the under-reporting of actual income would still exist, no 'boats will be rocked' if the present situation of the 'employer' club and the 'employee' dancer both having shown amounts of W2 income that 'agree' with each other is left to stand as-is. Additionally, no other 'boats will be rocked' in regard to other 'employee' dancers who worked for the same 'employer' who ( under ) reported similar amounts of W2 income ( yes, the IRS computers run automatic cross-checks on multiple employees of the same company to look for inconsistencies ... and would wave red flags if one employee's income is reported to be 3 times the amount of other employees working in a similar 'job classification'). But the immediate consequence of sticking with the status-quo is that the 'employee' dancers' unreported lap dance and tip income will not officially exist ... and therefore cannot be included in any 'income verification' by a would-be mortgage / auto / other lender.

    Of course, the long term consequences could be extremely serious as well if the IRS ever happens to 'stumble onto' the fact that the 'employer' club, and all 'employee' dancers working at that club, have been under-reporting dancer incomes and under-paying personal income taxes ( as well as the club has been under-paying social security taxes, disability and unemployment insurance premiums etc. ) for years !!! And one way for the IRS to 'stumble onto' this situation would be the filing of amended tax returns by an 'employee' dancer.

    Another way that the IRS could 'stumble onto' this situation could be the fact that, whenever a house is purchased, the state property title agency will make an automatic report to the IRS that a person with name X address Y social security number Z has purchased a house, that they are making monthly payments of A dollars plus property tax payments of B dollars etc. IRS computers will then take this data and start searching through past years' tax returns for person with name X address Y social security number Z to cross-check that the amount of income they have been reporting jives with the amount of after-tax dollars necessary to be able to afford making monthly mortgage payments of A and annual property tax payments of B, along with also being able to afford the average cost of living in their zip code area ( local food prices, gasoline prices, sales taxes, utility bills etc. ). If the amount of reported income is, say, $20k ... while the annualized cost of mortgage payments plus property taxes is $15k and the average cost of living is another $10k, it's virtually guaranteed that the IRS will soon come 'knocking'. And this situation only gets worse if the preliminary IRS computer cross-check also turns up the fact that the same person is also making annualized car payments of $5k per year, as automatically reported to the IRS by a state motor vehicle agency.
    Last edited by Melonie; 05-10-2012 at 01:15 AM.

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