consultant for a former employer - no 1099s, etc.

[ksal21]

At the end of 2018, I fully retired from my former employer.  I tried my hand at independent consulting through 2019 but had no success, i.e., expenses, yes, but no income whatsoever.  When covid hit in early 2020, I folded up the tent and began to grow comfortable as a retiree.  Late last year - 2021 - a new employee at my former employer contacted me and asked me to consider becoming a consultant for a period of one year.  We negotiated terms on a contract and my work commenced on December 1, the first day of their fiscal year.  Due to the organization's unique budget circumstances, they ended up paying me the entire contract fee in a lump some roughly the middle of December.

The work I perform is completely self-directed but does mirror some of the contributions I made while a full-time employee, e.g., providing advice and guidance on navigating global developments impacting the IT industry.  My question: do I still qualify for the full 20% QBI deduction or does the fact my client is my former employer disqualify me?  The relevant IRS regs provide more fog than clarity.  Thanks!  ~ Ken

[ColeenD3]

When you say, "a new employee at my former employer contacted me and asked me to consider becoming a consultant for a period of one year.", you are referring to the same company hiring you and not the individual himself?

In this case, the IRS is clear.  You can't take the QBI deduction. If you were previously an employee of a business and continue to provide substantially the same services to that business after you are no longer treated as an employee, there is a presumption that you are providing services as an employee for purposes of section 199A for the 3-year period after ceasing to be an employee.

[ksal21]

Thanks, Colleen.  I appreciate your quick response!  I dare say, however, that the IRS is not clear, at least as I read the agency's various explanations.  For example, what does "substantially the same services" mean?  When I was a full-time employee, I managed three policy committees, two of which included international and domestic responsibilities; represented the organization on European and U.S. federal advisory bodies; traveled extensively to four continents; and was fully reimbursed for all business-related expenses.  Under my current written contract, I manage no committee; only cover international developments for one policy area focused principally on two geographies (Canada and the EU), have no engagement whatsoever in U.S. domestic policy, and the contract explicitly states that no reimbursement will be provided for any business expenses incurred under the contract unless the client approves it in advance and in writing.  In addition, I am solely responsible for all federal and state taxes, FICA contributions, etc. 

I offer my consulting services to all prospective clients, as clearly indicated in my LinkedIn profile, for example.  These all clearly sound like conditions associated with a fully independent contractor v. even an IRS-designated "employee."  IRS Publication 15-A seems to support this.

Mind you, I realize that government regulation doesn't always align with what seems like common sense! Given all of the above, in your judgement, would you still posit that my client relationship still does not qualify as QBI per the IRS' reading?  Thanks again!  ~ Ken

[ColeenD3 · Accepted solution]

This is a judgment call. Only you know if it is substantially the same or not. The fact that you changed from some US to no US policy is insufficient, in my opinion. Are you in the same line of work? Are your day-to-day activities and contributions to your workplace essentially the same. It seems like the reason you were hired as a consultant was that you knew the ins and outs of the job since you used to do it.

[ksal21]

I believe I could make a real strong case in support of my position, but I am not of unlimited means whereas the IRS essentially is, and it would probably cost me more to "fight" it in the event of an audit.   Accordingly, I have reached a compromise of sorts.  Given that the contract started in December 2021, which was two years and 11 months after I retired, the bulk of the services will be provided beyond the IRS three-year QBI deduction threshold.  With this being the first income I've earned as a consultant, I will choose the accrual method of accounting and thereby wait until 2022 to claim the deduction - presuming Congress doesn't eliminate it in the meantime!

Thanks again for your feedback, Coleen.  Much appreciated!  ~ Ken