Experience Dilligencing Employment Practices - IRS Compliance with 1099s

by a searcher

2 years ago

Does anyone have experience dilligencing if companies are appropriately employing staff to comply with IRS and legal guidelines?

I am looking at a company that has almost all 1099s and when I read the IRS guidelines on employment classification, it seems like they should all be W2. However, it also seems like there are a lot of loopholes or gray areas to get around it. 

This could be driving inflated margins and lead to potential liabilities down the road. Even if we trade on the purchase price to account for the new costs associated with W2 employees, would there still be liabilities  / legal risk from historical employment practices with an asset sale structure?

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searcher from Indian School of Business

I've been diligencing this kind of deal and its really complicated with a lot of gray areas, even after consulting with employment lawyers (avoid regular attorneys for this, you need specialists). There are federal, state, and often municipal regulations to deal with, each of which carries different classification standards. Consulting two different employment lawyers gave me two totally different opinions. From what I understand, the liabilities can transfer over even in an asset sale, so you have to be super careful and even if you are confident, take indemnifications from the seller... not for the faint of heart.

2 years ago | like reply | 0 likes

professional from Villanova University - Villanova School of Business

Yes, we assist with the legal due diligence for employees and other legal matters of the transaction. The limitation of liability would depend on how well drafted the purchase agreement is, and how protective the terms are. A well drafted asset purchase agreement that's generally consistent with market terms will usually have the seller be responsible for all tax liabilities incurred pre-closing. If there's a known potential for liability, you may negotiate to have a certain amount of the purchase price to be held back for any indemnification claims or issues of that nature. The timeline for that hold back is negotiable, but in this situation, you would want it to align with the statute of limitations for the particular red flag matters such as the reclassification of w-9 employees to w-2 employees. I'd be happy to discuss this further.

2 years ago | like reply | 0 likes

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