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Thread: Help- my club screwed up my tax stuff

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    Default Help- my club screwed up my tax stuff

    I've been working for a club where I'm an employee. The crap on my pay check stubs and W-2's is completely erroneous. It's like the bookkeeper was playing Ouija board and smoking crack or something. They have been collecting "withholdings" from me in cash, none of which is reflected on my stubs or W-2. I've been withholding enough from my day job, but the problem is the reporting of tips. My CPA says I should have reported tips to them monthly, and may be liable for a penalty.
    Half the time they never cashed out us of put us in the computer, and who knows what they keyed in, because the stuff I received from them is crap. I am reporting my tip income on my tax return, but have to provide an explanation as to why I didn't declare them monthly. I don't want to get in trouble and I don't want to get the club in trouble.

    Advice?

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    Banned Melonie's Avatar
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    Default Re: Help- my club screwed up my tax stuff

    Yes, consider the cash 'withholdings' that you paid to the club but which did not appear on your W2 as non-deductible charitable contributions !

    You might want to look at some other threads which discuss the 'rock and the hard place' aspect of 'employee dancer' tips not being reported (or not allowed to be reported) to the club. As an 'employee' if you did not officially report this tip income to the club, and did not have this tip income and additional withholding appear on your pay stubs and on your W2, attempting to report it on your tax return raises potential risk of audit for both yourself and the club. The problem stems from the fact that, as an 'employee' dancer, the club is required to pay the 'employer's' share of SSI tax and also required to pay disability and unemployment insurance on the amount of income you earn. If you report a total amount of income from your dancing job which does not agree with the club's amount which appears on your pay stubs and W2, not only will the IRS computers send up red flags but the club may get a bill for the SSI tax and disability/unemployment insurance premiums that it did not pay on the tip income which doesn't appear on your W2 (meaning that you legally didn't declare it to the club as the IRS rules require you to do) but which you are now reporting to the IRS. This may also mushroom into an audit of your club and of all other dancers working at your club.

    One way to avoid sending the IRS red flags is to report your tip income from the club as independent contractor income from a "separate business" - which is not legal by IRS rules but which eliminates all of the IRS red flag potential since the W2 income amount reported with the club will now agree with the W2 income amount reported on your tax return. However, since you are not actually operating a "separate business" there is the risk that if you are ever audited in detail that you'll be charged with tax fraud. Even so, it is not at all uncommon for dancers to report additional incomes from 'separate businesses', i.e. working at other clubs which treat their dancers as independent contractors, webcam earnings, bachelor party earnings etc.

    The other way to avoid the IRS red flags is to not report your tip income at all - which is also not legal by IRS rules but which also results in the W2 income amount reported with the club now agreeing with the W2 income amount reported on your tax return. However, there is a risk that if you are ever audited in detail you'll be charged with underreporting your income. And even if you are never audited, most banks and financial institutions will only accept documented incomes i.e. income reported on tax returns for purposes of credit, loans, mortgages etc. Thus if you don't report your tip income, legally it doesn't exist - legally you can't spend it (and your bank and credit card records better not show that you did !) - and legally you can't borrow against it.

    Since the IRS matches up the reported incomes of all persons working under the same occupation code in the same zip code area for inconsistencies, your odds of sending up IRS red flags are also, to some degree, affected by how other dancers working at your club will report (or won't report) their tip incomes. If one dancer working for a particular 'employer' reports previously undocumented tip income on her tax return, and if other dancers working for that same 'employer' do not also report previously undocumented tip income on their own tax returns, the IRS is of course likely to assume that the other dancers are underreporting their actual incomes and schedule audits accordingly !

    By the 'letter of the law', there really isn't anything you can do at this point which is totally legal and which also doesn't carry a risk of causing problems for yourself and/or your club and/or other dancers working at your club. This is the essence of being caught 'between a rock and a hard place' by continuing to work for a club which is not properly following IRS 'tipped employee' income reporting and withholding rules (to avoid having to pay the 'employer's' share of employee's SSI taxes plus avoid paying disability/unemployment insurance premiums on the TOTAL reported income of all club employees). Worse still, YOU are legally in the role of a willing accomplice if 'push comes to shove' with the IRS and your club. Remember that, as your accountant already pointed out to you, legally speaking, it was YOUR responsibility as an 'employee' to regularly report your tip income to the club. It was also, legally speaking, your responsibility to point out any pay stub problems to the club. Thus legally it is YOU who will be held at fault by the IRS, and not the club, if things should turn nasty.

    If your accountant already feels the need to attach a letter of explanation to your tax return, I'm sure the reason is that he suspects a big red flag potential once the IRS computers start chewing on your tax return. The only thing that I can give you in the way of advice is to recommend having a short talk with other dancers at your club to find how how they plan on handling this situation in regard to their own taxes, and then having a very long talk with your accountant.

    !
    Last edited by Melonie; 02-18-2005 at 12:35 PM.

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    Default Re: Help- my club screwed up my tax stuff

    As an employee, any month in which you recieve $20 or more in tip income you must report it to your employer by the 10th day after the close of the month. You may use IRS form 4070 to report it to your employer. The employer is only responsible for 1/2 of the Social Security and Medicare taxes reported to them and withholding from your paycheck your 1/2 of the Social Security and Medicare taxes on the reported tip income.

    You are required to report all tip income on your tax return, even tip income that has not been previously reported to your employer. You will have to file using form 1040 and include 4137 for the Social Security and Medicare taxes on the tip income not reported to the employer. You, not the employer, will have to pay the full amount of the Social Security and Medicare taxes on the unreported tip income. Unless you can show reasonable cause for not reproting the tip income to your employer, you can also be subject to a penalty of up to 50% of the amount of the Social Security and Medicare taxes due from the unreported tip income.

    Talk with your tax advisor.

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    Default Re: Help- my club screwed up my tax stuff

    Unless you can show reasonable cause for not reproting the tip income to your employer, you can also be subject to a penalty of up to 50% of the amount of the Social Security and Medicare taxes due from the unreported tip income
    Do you suppose that an IRS agent would consider "I didn't report my tip income to the club because they would have fired me if I did because it would have forced the club to pay the proper dollar amounts of SSI and disability/unemployment insurance premiums" is a reasonable cause ?

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    Default Re: Help- my club screwed up my tax stuff

    This is several months late, since I took a little hiatus from this board...But just in case anyone wanted to know what happened, here it is:

    I reported ALL my income. I think this is the right thing to do, I've seen many lives ruined by not doing it, etc. So for me that was not an option. (Also, I believe that these types of businesses should be legal and that by subverting the law we lose our credibility when we want to claim our freedom of expression rights, be protected, etc. Operating outside the law just gives ammunition to the politicians who would shut down clubs for good.)

    I calculated the penalty (1/2 the unreported SS/MC), and it was about $200. (I worked there part time). I got my refund and I'm still waiting for the IRS to bill me for the penalty.

    As for the club, they put me in this position in the first place, which negates any sense of loyalty I have there. If they get audited, so be it. They deliberately misled me and pocketed my money and put me in the position of "paying withholdings" with a nasty surprise at the end of the year (And countless other girls too). While I feel sorry for anyone (dancer or otherwise) who gets audited, other adult women who choose not to pay taxes are not my personal responsibility.

    I have the same problem again next year, because I worked at the same club until February. And now I won't get a W-2 because I'm not there (they send it to the IRS, but won't pay for a stamp to mail it to the "employees")

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    Default Re: Help- my club screwed up my tax stuff

    As for the club, they put me in this position in the first place, which negates any sense of loyalty I have there. If they get audited, so be it. They deliberately misled me and pocketed my money and put me in the position of "paying withholdings" with a nasty surprise at the end of the year (And countless other girls too)
    I'm glad to hear that you worked your way through this issus. I also agree with you in principle. However, it's likely that if/when IRS attention is drawn to your club, that it will be the other dancers who were not as "honest" as you were in regard to reporting their incomes that will bear the brunt of any IRS audits.

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    Default Re: Help- my club screwed up my tax stuff

    Quote Originally Posted by Vanessa777
    I have the same problem again next year, because I worked at the same club until February. And now I won't get a W-2 because I'm not there (they send it to the IRS, but won't pay for a stamp to mail it to the "employees")
    Correct me if I am wrong. But, this is ILLEGAL. They cannot NOT send you a W-2. If I am also not mistaken, if this is reported to the IRS that you have not received a W-2 after requesting one be sent to you, there is a fine to the business. All businesses who have any tax forms to be sent out, must have those forms sent out no later than January 30th of any tax year.

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    Default Re: Help- my club screwed up my tax stuff

    For independent contractors they are supposed to send you a 1099 form, not a w-2.

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    Default Re: Help- my club screwed up my tax stuff

    Yes the club is legally required to mail you a copy of any forms they have sent to the IRS in your name.

    Niceguy, if you haven't been reading between the lines, the tax situation in this case revolves around a club which pays its dancers a tipped minimum wage (like $2.95 per hour) and does classify them as employees, such that a W2 is the proper form for the club to use. The problem stems from the fact that the club will not allow dancers to report their actual tip incomes (which would add up to several hundred dollars per week) and instead forces the dancers to report some token amount of tip income (typically equating to an additional $3-$4 per hour). The reason for this of course is that the club must pay 7 1/2% SSI, workmen's comp, state disability etc. which are all based on a percentage of the employee's reported income. Therefore if a dancer were to report her actual income, the amount of money the club must pay out would be much higher than it is with only a token amount of tip income being reported.

    Of course, this places dancers between a rock and a hard place, since by law they are required to report their actual tip income to their 'employer' the club. If a dancer wishes to be 'honest' about reporting her income under these circumstances, she is basically forced to break the law herself by reporting her actual tip income as independent contractor income from a separate business venture (which doesn't actually exist).

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    Default Re: Help- my club screwed up my tax stuff

    Yeah. The real problem is that the tax books of the club won't match that of the dancers.
    Let's face it accounting isn't too high a priority anyway. However with w2 set up versus IC setup, the share of social security contributions from employer and employee won't match.
    (By contributions I mean mandatory withholding). At income tax time the the IRS forms act as collector for unpaid (yet accrued) social security withholding that the employee owes but has not paid. The other question for the IRS at this time is has the employer paid the same
    amount the employee is claiming to pay. Either under or over the contributions should match. With a 1099 set up it is much less obvious.

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    Default Re: Help- my club screwed up my tax stuff

    Melonie is right on all counts. And yes, they are required to, but they don't which is a pain in the ass for me either way.

    HERE'S WHAT I DON'T UNDERSTAND- WHY does this club insist on the girls being employees if they are not willing to pay Soc. Sec., mail the W-2s, etc? Why don't they have girls sign a lease of space agreement and acknowledgement of the rules rather than filling out W-4's, etc? It's beneficial to us in terms of expenses and relieves them of certain burdens. I haven't figured out the benefit to the club of having so many "employees"

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