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Country: US

Company A has an hourly employee. Now the same owner has started a new company B (with separate entity, EIN, payroll, workers compensation, etc..) in the same state and would like the employee to also work there with the same hourly wage. The employee will get two separate paychecks, one from each company. The two companies will work such that there will be no time overlap or additional hours per week which means employee will have the same weekly hours irrespective of whether they work at only A or at A & B.

But the employee is balking at this saying that they will have additional tax overhead or reporting or some such. Are they right? Owner does not think so because its just the same hours paid all by one company (A) or shared by two companies (A - B + B).

How can owner explain to make employee see that there will be no loss to them with this arrangement?

Or should owner let employee have their way and only work at company A?

Employee says they will work hours at company B but that owner should make the paycheck for those hours come from company A. This could be a problem because company B will not have any payroll expenses to show for its bookkeeping, only revenues and so suffer higher taxes on profits. How does owner deal with this issue?

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    This seems more like a legal matter, but if I were the employee I'd be balking at having an extra W2 (assuming you're in the US, since your user name includes Illinois), which might also cause me more tax prep charges at the end of the year. – Kathy Sep 4 '19 at 19:35
  • Not sure how much each W-2 costs in terms of tax prep. What if owner provides the employee the tax prep fee difference for the additional W-2? Would that help? – employer_illinois Sep 4 '19 at 19:57
  • I assumed you were in the US based on your name and added the corresponding tag to your question. If that's not correct, please edit the question to change the location tag. – David K Sep 4 '19 at 19:57
  • Company A can "sell" the work of the Employee to Company B. Basically they are a contractor when they are working at company B – IDrinkandIKnowThings Sep 4 '19 at 20:03
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    Why not do yourself a favor and go see the tax office... – Solar Mike Sep 4 '19 at 20:16
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There are a handful of implications for the arrangement the employer is proposing, several of which may cause an employee to be legitimately unhappy.

First, as the employee seems to have indicated, there will be additional tax overhead. While the actual amount of tax due may not change, the employee will need to include two W2s in their tax filing instead of just one. There's also a chance that the taxes withheld will be incorrect, since the tax rate calculated on one payroll won't (inherently) account for the income from the other payroll. So, the employee may end up in a situation where not enough taxes are withheld, if they are placed in a too-low tax bracket. Alternately, the employee will be forced to predict the difference ahead of time and make adjustments to their W4s, which is not trivial for many people.

That seems to be the direct answer you're looking for, in terms of tax burden on the employee. However, there may be other (unintentional) consequences. Many labor laws are dependent on the hours the employee works, with the intention of regulating full time (or nearly full time) employees differently than part time employess. If a single boss creates two companies, and splits an employee's time across both of them, that may have the result of causing a person who is effectively working "full time" for that boss to be regulated as if they were part time. This can have immense impact on an employee, when it comes to things like protection for working hours, required benefits (specifically, healthcare), and so on.

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  • Thanks for the answer. What if the employee was only part-time at company A with just hourly wage and no benefits (not enough work available to get them full time). And owner would like to get them more hours by giving them the opportunity at company B (essentially expand operations)? Not sure how much each W-2 costs in terms of tax prep? What if owner provides the employee the tax prep fee difference for the additional W-2? Would these help both parties in this case? – employer_illinois Sep 4 '19 at 19:53
  • If the opportunity at company B gives them enough hours to put A+B at above the full time threshold, then the plan verges on cheating the employee out of legally mandated benefits (such as healthcare). You'd need to ask a tax prep service what the additional cost would be, but keep in mind that many people are just very nervous about tax complications anyways, because it can have a significant impact if you get it wrong. – dwizum Sep 4 '19 at 20:06
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If one of the employees have such a question, others later on may do the same.

Why wouldn't the employer open a third company C (let's call it outsourcing services), employ the employee full time and outsource the employee's services to A and B according to each of their needs?

From A's or B's point of view it is a B2B relationship - invoice against services rendered and the employee get his hourly paycheck from one company C.

One W2, all hours worked for same company, etc.

Perhaps that would affect his time worked for the same company, as he would move completely to C, but I don't know the implications of that (no industry has been specified by the OP).

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The primary issue is going to be the employee making sure their tax withholding information is set up correctly for each company. Recall that the United States has a progressive tax code, so an employee making less money at two different jobs will have -- unless they very carefully compute their "deductions" and "dependents" on their W-4 -- will have less total tax withheld.

The real issue comes from FICA withholding if the employee is earning more than the annual limit on the Social Security portion. When that happens, the two employers will continue to withhold even have a single employer would have stopped. The employee will eventually get a refund, but in the meantime they'll be back to juggling withholding rates trying to maintain the size of their paycheck.

Other answers have mentioned things such as benefits, and that's yet another way in which this can harm the employee -- they may not "qualify" (heh) for things such as insurance, and if Company A has a 401 k) and Company B doesn't, well, that's still more harm.

One issue which wouldn't happen, if the employers got their act together, is having to worry about "too much revenue" or "too many expenses", unless that's just plain handled wrong.

All that said, this is a disaster for the employee. What should be pretty simple for an employee working one full-time job will turn into playing Whack-A-Mole with deductions just to benefit the employer.

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  • I haven't worked in the retirement/benefits field for several decades, but IIRC related companies like this had to take all hours of the employee into account when deciding benefit eligibility and had to provide similar benefits. I could remember wrong, the law may have changed, and IANAL. OP should consult one, though, because running afoul of labor and tax law is not trivial. – Kathy Sep 4 '19 at 22:33
  • @Kathy - I wouldn't bother with a lawyer. If my employer did this to me I'd find another job. All the underlying goo in a business should be transparent to the employee. I did work for a company once where all of the "executive department" workers were employed by a different company, but eventually we were alll smooshed back together. And none of us noticed anything had happened. This is the exact opposite of how a company should behave. – Julie in Austin Sep 5 '19 at 3:01

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