Thursday, November 20, 2014

What Exactly Is Reported on W2s?

W2 Forms provide the IRS with presumptive evidence that a person has earned wages as defined in title 26.  Title 26 defines "wages" in two places, section 3121 and section 3401.
26 UCS 3121 defines 26 terms:
  • (a) Wages
  • (b) Employment = by someone in US (see (e)), on a ship or plane, or for the US or someone in the US, a partnership, trust, or corp.
  • (c) Included and excluded service
  • (d) Employee
  • (e) State, United States, and citizen = DC, PR, Virg.Is.,Guam, & Am.Samoa
  • (f) American vessel and aircraft
  • (g) Agricultural labor
  • (h) American employer = The US or an instrumentality of it, a resident of the US (see (e)), a partnership 2/3 of whose partners are residents of the US (see (e)), a trust if all trustees are residents of the US (see(e)), or a corporation organized under the laws of the US, DC, PR, the Virgin Islands, Guam, or American Smoa.
  • (i) Computation of wages in certain cases
  • (j) Covered transportation service
  • (l) Agreements entered into by American employers with respect to foreign affiliates
  • (m) Service in the uniformed services
  • (n) Member of a uniformed service
  • (o) Crew leader
  • (p) Peace Corps volunteer service
  • (q) Tips included for both employee and employer taxes
  • (r) Election of coverage by religious orders
  • (s) Concurrent employment by two or more employers
  • (u) Application of hospital insurance tax to Federal, State, and local employment
  • (v) Treatment of certain deferred compensation and salary reduction arrangements
  • (w) Exemption of churches and qualified church-controlled organizations
  • (x) Applicable dollar threshold
  • (y) Service in the employ of international organizations by certain transferred Federal employees
  • (z) Treatment of certain foreign persons as American employers
26 USC 3401 also defines "wages" along with seven other terms:
  • (a) Wages
  • (b) Payroll period
  • (c) Employee
  • (d) Employer
  • (e) Number of withholding exemptions claimed
  • (f) Tips
  • (g) Crew leader rules to apply
  • (h) Differential wage payments to active duty members of the uniformed services
You are probably a natural person, and you probably think you owe income taxes because you earn money.  You think that the money you earn qualifies as income.  If you're wrong about that, then you don't owe income taxes, do you?  If you visit the links above, you can read through the definitions to make sure the following two statements are correct.

A natural person earns "3121 wages" (see 3121(a)) only if that natural person was remunerated for (see 3121(b)):
  1.  working in the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, or American Samoa, or
  2. working on or in connection with certain ships or planes, or
  3. working for someone or something in District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, or American Samoa
A natural person earns "3401 wages" (see 3401(a)) only if that natural person belongs to the general class (see the end of the 6th sentence of the footnote in HELVERING v. MORGAN'S INC., 293 U.S. 121 (1934)) illustrated by the following list (see 3401(c)):
an officer, employee, or elected official of the United States, DC (see 26 USC 7701(a)(10)), or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing, or an officer of a corporation.

Please let me know of any other definitions of "wages" to which a W2 form might refer, or any legal scholar who can find an error in this analysis.

Finally, if you are aware of W2 forms that might be incorrect under this analysis, bug someone about it who can fix it until they explain it better, and please let me know!  If they can't, then stop letting the government rob you.

2 comments:

Patrick M said...

GREAT BLOG DAVE! KNOW ANY HONEST ATTORNEYS THAT ARE SUING PRIVATE EMPLOYERS THAT DIVERT SOME OF THEIR EMPLOYEE'S PAYCHECK TO THE IRS - WITH NO COURT ORDER - AND SOLEY ON THE BASIS OF A "LOCK IN LETTER" FROM "MP CONWAY, OPERATION MGR"?

Dave Scotese said...

I don't know of any attorney's who do that. That is an interesting approach. I don't trust the "system" enough to use it. I sent the following to my largest client, and I'm hoping that they are really bugging their lawyers about it:

Before your accounting firm (or whoever) files 1099-MISC forms
which ought not to be filed, please consider this email. I understand that you will probably still file one about what you've paid me this year, but I figured I should give you the chance to ask around about this in case you'd like to understand the tax laws a little better:

The first page of instructions for the 1099-MISC (http://www.irs.gov/pub/irs-pdf/i1099msc.pdf) says "Report on Form 1099-MISC only when payments are made in the course of your trade or business," which, according to 26 USC 7701(a)(26) (http://www.law.cornell.edu/uscode/text/26/7701) means "... in the course of your performance of the functions of a public office."

If it also included, as the IRS indicates it does for Charities and non-profits (http://www.irs.gov/Charities-&-Non-Profits/Trade-or-Business--Defined), "any activity carried on for the production of income from selling goods or performing services", then the definition would include that, or at least include "what 'trade or business' generally includes."

It's true that the definition of "trade or business" uses the term "includes" which seems to suggest that Congress was worried about people who perform the functions of a public office thinking that they don't have to report payments to their contractors and so Congress wanted to say that "in addition to what everyone thinks is a trade or business, this term also includes...". But they didn't say that. If you want to ask your lawyer about "presumption," I recommend it. Using that "what everyone thinks is..." logic when applied to a definition in law is presumptuous, and therefore wrong. The term "trade or business" is confined to the "general class of things" that arise out of the list of what it "includes" (as shown by a Supreme Court case (https://supreme.justia.com/cases/federal/us/293/121/case.html) that explained what "includes" does in a statutory definition). There's really only one general class you can get from "the performance of the functions of a public office," and I don't think you've really considered whether or not you're in it.

To see what I mean, look at the definition of employee at 26 USC 3401(c) (http://www.law.cornell.edu/uscode/text/26/3401), which says the term "includes an officer, employee, or elected official...". Notice that the definition of "trade of business" does not mention either "trade" or "business", but the definition of "employee" does use the term "employee". This follows the legal principle that when a statute defines a term ("trade or business"), the definition completely replaces the common meaning of the term. In order for employees of the United States or whatever to be included, they had to be listed as part of the new definition. The same is true for "trade or business", and since they aren't listed, they aren't included.

Why would Congress restrict the meaning of "trade or business" that way? Because the income tax, as written, would not be constitutional otherwise. John has the book that explains this, and the US Dept of Justice has twice denied the IRS' request to issue an injunction against the book for being wrong. Twice denied pretty much proves that the book isn't wrong. There are lots of other indicators (http://www.losthorizons.com/index.html) which would only exist if the book is correct and threatens to end what is a gigantic legal scam by pulling the curtain back.

I can send you links that address just about any concern, so let me know if you have any.