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Posted by tallladude on February 4, 2007, 2:24 am
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I'm in a dilemma that seems even too tough for the IRS to
yield enough information on how to properly resolve (at
least through their general 800 number).
In 2005, I signed on to do work for a small company as a
1099 contractor. The company was just getting off the
ground, had no office yet, and the work I did was very
piecemeal. After 5 months, the company got funding and I
was hired as a full-time employee. I was promised benefits
and such, but the woman I worked for convinced me I'd do
better by remaining a consultant since doing so, would allow
me to claim lots of deductions, thus lowering my taxes. Put
on the spot, I agreed, but quickly realized it was a foolish
decision. (Foolish, because she lowered my rate to reflect
being an employee, but didn't return it to the contractor
rate after she backed me out as an employee.) I stayed
because I thought things would improve financially as
cashflow improved and didn't look forward to another job
search, but when things grew worse, I left in 2006.
Not at all happy with the way she "conned" me into the
status change, since doing so actually left me with a
greater tax liability (paying the self-employment FICA
taxes), I decided to file an SS-8 with the IRS to get a
determination on whether I was a common law employee. If
they ruled in my favor, I thought I wouldn't have to pay the
added FICA taxes on income earned from the point she had
first made me an employee.
I earned about $35k in compensation during the first five
months as a contractor, so when I filed my taxes, I opted to
put $6000 into a SEP- IRA. I filed using the extension in
October, but according to the rules, SEP-IRAs could be
funded to the filing deadline including extensions. Knowing
my income was going to be drastically lower in 2006, I then
converted this to a ROTH IRA.
The SS-8 determination takes over six months to complete.
They tell you to file using the conditions of your expected
ruling. In December 2006, I got the ruling back. Instead
of deeming me an employee from the point I was "hired"
full-time, they ruled me an employee for all my work with
this company. On the upside, I can file an amended return
to get back the FICA I overpaid for compensation I filed
under a 1099. On the downside, it leaves me in a quagmire
on the retirement deduction.
Here's what I'm trying to figure out:
I know that at least $2000 is an excess contribution that
needs to come out. Since I'm under 50, I'm only allowed a
$4000 contribution to a regular IRA. But what about the
$4000. I made it to a SEP-IRA, not a tradtional IRA. The
IRS can go back in time and rule my circumstances to be
different, but I can't go back in time and change them in a
likewise fashion. Will I be able to maintain at least a
$4000 deduction for TY2005? And if that's not confusing
enough, how is the ROTH conversion handled? I'm guessing
I'll have to pay the 6% excise tax on excess contributions--
which doesn't seem fair since it was the IRS who told me to
act on the expected ruling. Since their ruling differed
from what I expected, I'm now to get penalized for it?
So at the moment, I basically have $6000 in a (converted)
ROTH IRA. Ideally, I'd like to be able to take the $4000 IRA
deduction for TY2005, pay back the taxes on the excess
deduction ($2000) I took, then declare the $2000 be a ROTH
contribution for TY2006 (I'm well within the income limits
to do so). The distinction between a SEP-IRA and
traditional IRA is the big confusing factor. My fear is
that they are distinctly different, making it impossible to
reclassify the SEP as a traditional, which means the entire
contribution will need to be backed out and I'll be hit
heavy with the taxes/excise penalties.
I called Fidelity to ask for possible action to take. They
wouldn't even begin to make a suggestion as to what to do,
saying it was a tax matter and they don't give tax advice.
So, basically I need to figure out what needs to be done,
then give them instructions on how to make this kosher.
Any advice would be appreciated.
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