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Your Client Got a W-2 and a 1099 from the Same Company. Here’s How to Handle It

Earmark Team · May 15, 2026 ·

Your client slides a W-2 and a 1099-NEC across the desk. Both are from the same company for the same tax year.

“Can this be right?” they ask.

Your gut says error. Often, it is. But sometimes that dual reporting is perfectly legitimate. Knowing the difference, and what to do when it’s wrong, separates a competent preparer from the advisor clients can’t afford to lose.

This is the territory Jeremy Wells, EA, CPA, covers in Part 2 of his worker classification series on the Tax in Action podcast. If you caught Part 1, you already know the common law control test for determining whether someone is an employee or contractor. Part 2 goes deeper into the statutory categories that break that simple binary wide open.

Statutory Employees: The Hybrid Category Most Practitioners Overlook

Beyond corporate officers (always employees) and common law employees (determined by the control test), the Internal Revenue Code creates a third category that confuses even experienced practitioners.

IRC Section 3121(d)(3) defines four occupational groups treated as employees for FICA and sometimes FUTA purposes, but not for federal income tax withholding. This hybrid status creates unique reporting requirements you need to understand.

The four groups are:

Agent or commission drivers (FICA + FUTA): Workers distributing meat, vegetables, fruit, bakery products, beverages other than milk, or laundry/dry cleaning services
Full-time life insurance salespersons (FICA only)
Traveling or city salespersons (FICA + FUTA)
Home workers (FICA only): Traditionally textile workers, but now including typing and transcribing services

Jeremy emphasizes an important point. “Home workers” doesn’t mean anyone working from home. It’s a specific statutory category.

To qualify as a statutory employee, these workers must meet three requirements. First, the contract must state the worker will personally perform all the work; no delegation allowed. If they can subcontract, they’re an independent contractor. Second, they can’t have substantial investment in facilities beyond transportation. Owning a delivery truck is fine; investing in other equipment probably disqualifies them. Third, there must be an ongoing work relationship, not a one-time gig.

Here’s where it gets interesting for practitioners.

Statutory employees receive a W-2 with box 15 checked. But that W-2 doesn’t go on page one of the 1040 as wages. Instead, it goes on Schedule C as gross income. The worker can then deduct related business expenses. That’s a huge advantage regular employees lost when the Tax Cuts and Jobs Act eliminated unreimbursed employee business expenses.

But there’s a catch. This income isn’t subject to self-employment tax because FICA was already handled through employer withholding. You must keep this Schedule C completely separate from any self-employment activity. And you can’t use this income to fund a SEP IRA or Solo 401(k).

Full-time life insurance salespersons get special treatment. They’re eligible for certain employee benefits from their companies. The other three statutory employee categories are independent contractors for benefit purposes. But even insurance salespersons can’t use their compensation for self-employed retirement plan contributions. “This is one of those cases where tax law just kind of won’t make sense,” Jeremy notes.

When Workers Are Never Employees, and When They’re Both

The code also designates three categories of workers who are never employees, no matter what.

First, sitter placement services under IRC Section 3506. Someone who only connects babysitters or caregivers with families isn’t the sitter’s employer as long as they’re paid on a fee basis and don’t handle wages. They’re just a third party making introductions.

Second and third are qualified real estate agents and direct sellers, covered by IRC Section 3508. Real estate agents need a license, commission-based pay, and a written contract stating they’re not employees. Jeremy notes this is “almost a universal arrangement” between brokerages and agents. Direct sellers follow similar rules. They sell products outside permanent retail establishments with commission pay and non-employee contracts.

This brings us back to our opening question. Can someone legitimately get both a W-2 and 1099 from the same company?

Yes. Revenue Ruling 58-505 tackled this exact situation. Insurance company workers served as corporate officers (running the company) and independent sales agents (selling policies). The IRS said they were employees for officer duties but contractors for sales activities.

“Imagine a corporate officer who also sits on the board of directors,” Jeremy says, offering a common example. “In fact, this is fairly common for a lot of companies, especially smaller family held companies.” If board service warrants separate compensation, they could receive employee wages for their officer role and contractor pay for director duties.

But dual reporting isn’t always this clean. “I’ve seen cases where the worker did not have the necessary paperwork to the employer in time to be on payroll when that worker had already been working,” Jeremy says. Sometimes a bookkeeper or tax advisor discovers mid-year that someone’s been misclassified all along. “I’ve been in the position where I’m the one having to have this conversation with a client,” he admits.

When you see both forms from one company, ask questions. What services generated each form? The answer determines whether you’re looking at a legitimate dual arrangement or a classification problem that needs fixing.

The Relief Toolkit When Classification Goes Wrong

Classification mistakes happen. Jeremy calls them “inevitable.” Knowing which relief mechanisms to use can mean the difference between a manageable fix and a disaster.

First, understand the employer is ultimately responsible. IRC Sections 3402, 3101, and 3111 require employers to withhold and pay employment taxes. Section 7501 requires holding these amounts in trust, with serious penalties for non-compliance.

There’s one escape valve. Under Section 3402(d), if an employer didn’t withhold income tax but the employee paid it anyway, the employer is off the hook for that amount. But only if the employee actually paid.

IRC Section 3509: Relief for Honest Mistakes

This applies when employers misclassify workers without “intentionally disregarding” their withholding duties. If they filed 1099s, the liability drops to:

1.5% of wages for federal income tax
20% of what should have been withheld for FICA

If there are no 1099s, those rates double to 3% and 40%.

The lesson is, always file 1099s for workers you’ve classified as contractors. Even if you’re wrong, it cuts potential liability in half.

Section 3509 won’t help if the employer intentionally ignored the rules, withheld income tax but not FICA, or if the worker is a statutory employee.

In Mescalero Apache Tribe v. Commissioner (2017), the Tax Court ruled the IRS must share taxpayer information with employers in these cases, letting them verify whether workers paid taxes on their 1099 income.

Section 530 Relief: Wiping the Slate Clean

Section 530 of the Revenue Act of 1978 can eliminate employment tax liability entirely if three requirements are met:

Reporting consistency: Timely filed 1099s
Substantive consistency: Didn’t treat similar workers as employees
Reasonable basis: Relied on prior audit, court precedent, or industry practice

The consistency test looks at actual duties rather than job titles. If you treat one delivery driver as an employee and another as a contractor, you’ve got a problem.

Worker-Side Relief

Workers can file Form 8919 to report their share of uncollected Social Security and Medicare taxes. They’ll need a reason code:

A: Received SS-8 determination saying they’re an employee
C: Other IRS correspondence confirming employee status
G: Filed SS-8, waiting for response
H: Received both W-2 and 1099 from same firm

Jeremy offers practical wisdom here. “I’ve actually been involved in situations where I thought my client really should have been treated as an employee. I told them about that, and they were perfectly fine going along with the status quo.” Your job is to inform, not insist. It’s ultimately the taxpayer’s decision.

Form SS-8 requests an official IRS determination. Either party can file it. The IRS gets both sides’ perspectives, then issues either a binding determination or non-binding advisory letter. This isn’t a tax return examination, so normal appeal rights don’t apply, though you can submit additional information for reconsideration.

Your Action Plan

Worker classification isn’t binary. Treating it that way gets practitioners and their clients in trouble.

Key takeaways from Jeremy:

Statutory employees live in a genuine hybrid space. W-2s that report on Schedule C. Business expense deductions that regular employees can’t claim. But keep that Schedule C separate from self-employment income.
Some workers are contractors by law. If real estate agents, direct sellers, and sitter placement services meet the statutory requirements, the common law test doesn’t matter.
Dual status is real. When you see both forms from one company, investigate before assuming error.
Always file the 1099. Getting classification wrong but reporting right cuts liability in half. Skip the 1099, and you double the pain.
Know your relief options. Section 3509 for honest mistakes. Section 530 when there’s reasonable basis. Form 8919 for workers needing FICA credit. Form SS-8 when you need the IRS to decide.

These aren’t rare edge cases. They’re the messy realities that walk through your door regularly. Having command of both the categories and corrections is what makes you indispensable.

For the full technical detail and Jeremy’ classroom-tested explanations, listen to the complete episode. And if you haven’t already, go back to Part 1 for the foundational common law control test. Together, these episodes give you the information you need to answer any worker classification question your practice will face.

The Overtime Deduction Just Made the Department of Labor’s Definition of Employee Your Problem

Earmark Team · May 8, 2026 ·

The gig economy has exploded over the past decade. From Fiverr to Uber, from seasonal warehouse workers to freelance accountants, the line between employee and independent contractor has become increasingly blurred. California alone spent years in legal battles over worker classification, with court cases dragging on and state laws changing back and forth.

However, a single worker can legally be an “employee” under one federal law and an “independent contractor” under another for the same work, at the same time. And thanks to the One Big, Beautiful Bill Act, this distinction directly impacts your tax practice.

In Episode 24 of Tax in Action, Jeremy Wells, EA, CPA, tackles this complexity head-on in the first part of a two-part series on worker classification and misclassification. He breaks down exactly how the IRS distinguishes between employees and independent contractors and why tax professionals cannot ignore definitions that come from outside the Internal Revenue Code.

Payroll Taxes Are at the Heart of This Discussion

As Jeremy emphasizes early in the episode, “the tax consequences can be significant for both the employer and the worker.” The gig economy creates opportunities for flexible work, but also leaves workers without employment benefits, fair labor protections, and payroll tax matching.

Payroll taxes are “really the most important aspect of this discussion from a tax perspective,” Jeremy explains. It comes down to who’s responsible for the payroll tax or self-employment tax that results from the money earned.

The stakes are high. Misclassifying a worker can lead to both the employer and worker facing tax liabilities that compound quickly. Get it right, and everyone knows where they stand with FICA, FUTA, and federal income tax withholding.

One Word, Multiple Federal Definitions

For most of our careers, we’ve operated within the comfortable boundaries of Title 26, the Internal Revenue Code. If someone mentioned the Fair Labor Standards Act (FLSA), we knew that was the labor lawyers’ territory. Not anymore.

Jeremy explains that “employee” means different things in different contexts across federal law. There’s a well-established principle that a term should have the same meaning within a single title of the U.S. Code, but it can mean something entirely different when you cross from one title to another.

The Department of Labor uses what it calls the “economic reality test” to determine employee status under the FLSA. This test examines six factors:

Opportunity for profit or loss based on managerial skill
Investments by both parties
Permanence of the relationship
Nature and degree of control
Whether the work is integral to the employer’s business
The worker’s skill and initiative

The key question for the DOL is economic dependence. As Jeremy notes from the DOL’s Fact Sheet 13, “If the economic realities show that the worker is economically dependent on the employer for work, then the worker is an employee.”

The critical distinction is that the DOL explicitly states, “employment under the FLSA is not determined by technical concepts or common law standards of control. It is broader than the common law standard often applied to determine employment status under other federal laws.”

The 2025 Change

Why does this matter for tax professionals? The One Big, Beautiful Bill Act created a new deduction for overtime pay, but it specifically references FLSA Section 7, which deals with employees entitled to overtime compensation.

“An employee who is covered under FLSA Section 7 may qualify for a deduction for part of the overtime payment that the worker earned,” Jeremy explains, highlighting the significance.

This creates an unprecedented situation because “a worker can be considered an employee under FLSA and therefore eligible for potentially deductible overtime, yet not considered an employee for federal employment tax purposes.”

The IRS recognized this gap. In Notice 2025-69, the agency provides guidance on “how employers should report overtime paid to workers who are covered under FLSA Section 7 but are not employees for payroll tax purposes and so won’t receive a W-2.”

The IRS Control Standard: Three Categories That Drive Every Decision

So how does the IRS actually decide who’s an employee? It starts with IRC Section 3121(d), which provides four statutory definitions: common law employees, and corporate officers, certain statutory employees, certain statutory nonemployees.

For most situations, we’re dealing with the common law employee definition. That definition hinges on the common law “right to control” standard, which comes from Supreme Court precedent.

The standard boils down to one question: Does the employer retain the right to direct and control the means and details of the work?

“It’s less about whether the employer actually does control the worker, and more about whether the employer retains the right to control the worker,” Jeremy says, emphasizing a crucial distinction.

An independent contractor, by contrast, is “typically subject to control only as to the desired result, not the means or the methods of doing the work.”

The Evolution from 20 Factors to Three Categories

Courts have spent roughly half a century developing this definition. Key cases include Weber v. Commissioner (1994), Professional and Executive Leasing, Inc. v. Commissioner (Ninth Circuit, 1988), and Simpson v. Commissioner (Tax Court, 1975).

In 1987, the IRS and Social Security Administration compiled 20 factors from court precedents and published them in Revenue Ruling 87-41. Then in 1996, the IRS reorganized these into three categories of evidence in an examiner training manual. Jeremy stresses these are “categories of evidence. They are not themselves legal tests.”

Behavioral Control: The Details and Means of Performance

This category examines whether the employer has “the right to direct or control the details and means by which the worker performs the required services.”

Key indicators include:

Instructions: Jeremy uses a simple example: “If I hire a worker and tell that worker, ‘I need you to produce a widget for me,’ and I don’t tell them anything more than that, then I have given that worker essentially no instruction.” That leans toward independent contractor. But if you specify the tools, timeline, location, and step-by-step process, that leans toward employee.
Evaluation: Monitoring how work is performed (not just the final result) indicates greater control.
Training: Required, periodic, or ongoing training on methods and procedures suggests employment.
Uniforms and branding: These can indicate employment, but Jeremy notes modern realities. “Customer security concerns have led some of these companies to insist that their workers dress up in their uniforms, and have their logos displayed even though they’re classified as independent contractors.”

Jeremy adds a nuance particularly relevant for professionals: “Instructions imposed by the business merely to ensure compliance with customer orders or governmental or governing body regulations may indicate weaker control than more stringent guidelines imposed directly by the business.”

Financial Control: The Economic Aspects

This category looks at “the right to direct or control the economic and business aspects of the worker’s activities.”

Important factors include:

Significant investment: Who provides equipment and pays for large expenditures? Jeremy notes everything is relative. “I run an accounting firm. The biggest equipment expense we have is computers. That’s nothing compared to buying large equipment for a factory.”
Business expenses: “Choosing to incur unreimbursed expenses typically indicates that the worker has the right to direct and control the financial aspects of the business operations.”
Market availability: Can the worker seek other business opportunities? Jeremy emphasizes a critical distinction from the DOL test, citing Nationwide Mutual Insurance Co. v. Darden (Supreme Court, 1992): “The question here is whether the worker has the right to direct and control business-related means and details of the worker’s performance, not whether the worker is economically dependent.”
Method of payment: Guaranteed salary or hourly wages typically indicate employment, though Jeremy notes “plenty of independent contractors, especially freelancers and firms as well, bill for time.”

Relationship of the Parties: Intent Concerning Control

This category examines how both parties perceive their relationship.

Written agreements: These help establish intent, but Jeremy warns, “Just because something’s in writing doesn’t necessarily make it so. We still have to look at the substance of the relationship.”
Incorporation: If a worker operates through a legitimate entity that “follows corporate formalities and has at least one non-tax business purpose,” that generally supports independent contractor status.
Employee benefits: Certain benefits, such as tax-qualified retirement plans, 403(b) annuities, and cafeteria plans, can only be provided to employees. Benefits paid to contractors can often uncover a worker misclassification case. Jeremy is clear: “If we see any of these kinds of benefits, then by definition, we have an employee.”

The S Corporation Officer Trap

Jeremy saves one of his strongest warnings for corporate officers. “Corporate officers are generally considered employees, especially if they are providing services to the corporation.”

For S corporations, this is critical. “An officer of an S corporation that provides services to that corporation is an employee, meaning that individual needs to be paid wages.”

The only exception requires meeting both conditions: the officer provides minor or no services AND is not entitled to receive any pay, directly or indirectly.

Jeremy calls out a common but problematic practice. “One way some tax professionals try to use two wrongs to make a right is issuing a 1099-NEC from the S corporation to that individual. Two wrongs don’t make a right.”

“Even though they both go into Social Security and Medicare, paying self-employment tax is different from paying FICA.” The tax liabilities remain; you’ve just created documentation of the misclassification.

Interestingly, Jeremy notes that one person can legitimately receive both a W-2 and 1099 from the same corporation. “You can have an individual working as an officer for a corporation and as a director for a corporation. That individual’s wages earned as an officer would be reported as wages on a form W-2, and then that individual’s pay as a director would be paid as compensation to a non-employee.”

Most Workers Live on a Spectrum

Jeremy brings us back to practical reality. “In the real world it’s a spectrum. On one end of that spectrum is a pure independent contractor where the employer just says, this is what we want you to do. Now go do it. On the other end, we have an employee where the employer tells the employee exactly how to do every single step.”

Most workers fall somewhere in between. As tax professionals, Jeremy explains, “we might have to make a determination of which end of that spectrum does this worker lean toward more?”

What Comes Next

This episode is part one of a two-part series. In part two, Jeremy will cover what happens when we have a misclassification and what workers and employers can do about that misclassification.

For now, the practical takeaways are:

Learn the DOL’s economic reality test. The overtime deduction depends on it.
Review IRS Notice 2025-69 for guidance on FLSA-covered workers who aren’t employees for tax purposes.
Use the three categories of evidence as your analytical framework, remembering the underlying legal test is the control standard.
Audit your S corporation clients. Officers providing services must be on payroll.
Document substance over labels in all worker relationships.

Listen to the full episode of Tax in Action to hear Jeremy walk through the complete analysis, including all the court cases and regulatory citations that inform these critical classification decisions.

The Month-End Close Is Accounting’s Biggest Bottleneck. Here’s How AI Is Dismantling It

Earmark Team · May 7, 2026 ·

The day before a tax deadline, and accountants from Miami to Vancouver, Portland to New York, logged into a CPE-eligible webinar to learn something that could fundamentally change how they work. The webinar showed how these professionals can shrink the most time-consuming part of their month-end close, like reconciliations, transaction coding, and bank statement chasing, from days to minutes.

Megan Reid, product specialist at Digits, led the session, and she brings a unique perspective. She’s an accountant with 15 years in the trenches, starting at a Big Four firm, moving through banking and construction, and now helping firms build what she calls an “AI-native” practice. As she put it to the audience, “As accountants, we want to be able to serve more clients, provide better service, and do so quickly and efficiently.”

The traditional month-end close is accounting’s biggest bottleneck. It’s that manual grind through booking transactions, reconciling statements, updating schedules, reviewing anomalies, and (if there’s time left) analyzing the numbers and creating the reports clients care about. “It’s a manual, tedious, time-consuming process that honestly leaves a lot to be desired for both the business owners and the accountants,” Megan said bluntly.

But what if you could flip that entire workflow? What if instead of reviewing every transaction, you only touched the ones AI couldn’t confidently handle? That’s exactly what Megan demonstrated live, showing how AI-native platforms transform the close from a compliance chore into an opportunity for real advisory work.

The bottlenecks killing your efficiency

Before diving into solutions, Megan mapped out where the traditional close breaks down. You start in QuickBooks or your ledger of choice, but quickly find yourself bouncing between Excel, browser tabs for vendor research, your close management tool, and who knows what else. “Not only are you managing the work across all these multiple platforms,” she explained, “you’re also spending time validating sync accuracy, troubleshooting issues, and making sure the data moves seamlessly throughout the various systems.”

Each phase has its own special frustrations:

Manual data entry and rule management introduce human error
Fighting with bank access and chasing clients for statements
Disconnected tools for AP, credit cards, and close management
Team members use different processes, causing rework and confusion
Manual journal entries pile up at period-end

As a result, most of your time goes to necessary but low-value tasks, leaving little room for the analysis and insights your clients actually hired you to provide.

How AI learns your way of doing things

The shift to AI-native platforms involves intelligence that learns and adapts. When Megan pulled up the demo client in Digits, she showed hundreds of transactions the AI automatically categorized. Only eight were flagged for review.

“How does it know how to categorize transactions?” she asked, anticipating the obvious question. The answer lies in three layers of learning.

First, there’s client-level learning. When you correct a categorization for a specific client, the system learns instantly. “If you review something for a brand new client and you say, ‘nope, you categorized this to software, but I actually want it to be cost of revenue,’ Digits learns from that instantly,” Megan explained.

Second, there’s firm-level learning. The system recognizes patterns across your entire client base. If the system does not have the client-level layer of knowledge, it falls to the firm-level. “How has my firm done this across all of my clients? It automatically applies your firm’s unique value to your client base.”

Third, when a transaction is entirely new, proprietary models trained on billions of dollars’ worth of transactions make the call.

During the live demo, Megan reviewed a U.S. Patent and Trademark Office transaction the AI thought might be taxes. She looked at the suggestions (taxes, legal, or a new intangibles account), selected “Legal,” and clicked save. The system immediately found two similar transactions and updated them automatically. The review queue dropped from eight to five in seconds.

But what really eliminates busywork is the AI agents run 24/7 in the background, researching vendors and populating details. “None of this has been populated manually,” Megan showed, clicking through a vendor profile complete with name, logo, description, and related websites. “We’re essentially researching them and populating all of the data for you.”

Bank reconciliation without the chase

If transaction categorization is tedious, reconciliation might be even worse. You know the drill: fighting for bank access, emailing clients for statements, then manually comparing the ledger to the statement line by line.

Megan demonstrated the “happy path” first. Digits pulled a Mercury bank statement via an API, automatically kicked off reconciliation, matched every transaction with pixel-level precision on the PDF, confirmed the ending balance, and finalized everything. Zero human touches required.

“Some firms we work with actually say, ‘I uploaded six months of bank statements and just watched them finalize one by one. And I didn’t do anything,'” Megan shared.

When auto-reconciliation can’t finalize completely, it doesn’t leave you guessing. The system flags specific issues, such as:

Missing transactions that exist on the statement but not in the ledger (one click to create)
Date mismatches where something cleared May 31 but hit the ledger June 1 (one click to adjust)
Unsettled items like checks that haven’t cleared yet

For banks without API access, such as small credit unions, you simply drag and drop a PDF statement. During the demo, Megan dragged a statement into the system and watched it extract data and start reconciling in seconds.

She took it further with a cleanup scenario. Starting with a brand-new bank account, she imported a PDF statement. Within moments, 14 transactions appeared as uncategorized. Seconds later, the AI had populated every vendor name and category without a single manual input.

Turning saved time into client value

Speed alone isn’t the point. As Megan emphasized, “the compliance and the month-end close is really just a means to an end,” the end being insights and value for clients.

The dashboards in Digits default to the current month because, as Megan noted, “knowing something two months late doesn’t usually help.” Every metric is live and drillable. Click into gross income, and you see the definition, calculation, and every underlying transaction. Your clients finally understand how you arrived at the numbers.

Each client gets customized dashboards. “Maybe you have a client that’s like, ‘we’re spending so much money on travel,'” Megan explained, showing how to add customized metrics that are specific to each client. A profitable client with ten years of runway might swap that widget for gross profit or vendor analysis.

Collaboration happens right on the platform. On any transaction, category, or report, you can leave a question. The client receives a notification and can respond directly from email without logging in. “One of the biggest pain points is transfer of knowledge,” Megan said, “making sure that you have everything that you need from your clients and vice versa.”

Custom reports become interactive stories rather than black-and-white PDFs. The AI generates insights like “You earned 33% more in March compared to the prior month” with drill-down capability to see exactly why. Important insights can be pinned to the executive summary so they’re the first thing clients see.

What this means for your firm

During the Q&A, attendees asked practical questions. One wondered if this integrates with QuickBooks or replaces it entirely. “Digits is a complete ledger system. So it’s a complete replacement,” Megan answered. They can migrate QuickBooks data in about two minutes, but this is a ground-up rebuild, not a bolt-on tool.

Another attendee asked about company scale. The focus is on small and medium-sized businesses, which is the client base most firms serve.

The shift from reviewing everything to reviewing only exceptions makes the close faster and more consistent across your team, less error-prone, and it frees up capacity to serve more clients without hiring proportionally.

“It’s a very exciting time to be an accountant while also a little bit scary,” Megan acknowledged near the session’s end. “I think it’s a time to really lean in and be excited.”

She’s right. The firms embracing AI-native tools now will deliver premium advisory services while their competitors are reconciling bank statements at midnight.

To see these workflows in action, watch the full webinar. Every accountant who signs up gets access to a sandbox demo environment where you can test these workflows with real data. And if you attended live or watch the recording, you can earn CPE credit through the Earmark app. Just search for the course and complete the quiz.

The close is changing. Will you lead that change or follow it?

A $50 Billion Company Couldn’t Match a Wire Transfer to an Invoice—And Your Clients Probably Can’t Either

Earmark Team · May 4, 2026 ·

Three years ago, Baxter Lanius received an email from a large software vendor, a company worth close to $50 billion, telling him he hadn’t paid his invoice. The invoice was a year old. Baxter checked his records, found proof of payment, and sent it back. The vendor responded, “Can you send me the PDF proof from the bank?” They’d received two wire transfers on the same day for the same amount, and they couldn’t figure out which one was his.

“I was like, oh my God, this is crazy,” Baxter recalled during a recent Earmark webinar, Build Predictable Collection Workflows That Improve Client Cash Flow. “How is a company this large having such a difficult time reconciling the transaction?”

If a $50 billion company can’t match a wire to an invoice, imagine what’s happening inside your clients’ businesses (or your own firm).

Baxter, the CEO and founder of Alternative Payments, has spent the past decade working with service-based businesses, including accounting firms, business process outsourcing companies, IT services, and even fast-casual restaurants and logistics companies. They all share the same problem. They struggle to get paid. And the costs are far higher than most realize.

The reality is, service-based businesses leave tens of thousands of dollars on the table each year because their accounts receivable workflows remain stuck in a manual, check-driven era. But as Baxter demonstrates in the webinar, by using four specific automation levers—autopay enrollment, automated reminder sequences, dynamic customer segmentation, and integrated reconciliation—firms can cut average collection times from 35+ days to about five, boost online payment adoption from 30% to 70%, and transform cash flow from a headache into a competitive advantage.

Accounts receivable is broken, and it’s costing you

This number should stop you in your tracks: $25 trillion. That’s the annual volume of B2B payments in the United States alone. And about 40% of that money still moves by check.

You swipe your credit card at the drugstore and use Apple Pay to order dinner. Consumer payments have been frictionless for years. But when one business pays another, we still stuff paper into envelopes.

Baxter pointed out this isn’t universal. In Brazil and India, most B2B transactions happen fully online. The U.S. banking system was so advanced so early that it created inertia. Countries like Brazil and India skipped the desktop generation and went straight to mobile, which forced their technology to accelerate faster. Meanwhile, American businesses built their workflows around checks decades ago and never fully let go.

The fragmented software stack makes everything worse. Consider your typical services-based business. There’s practice management software, a CRM, billing platforms, accounting or ERP software, and maybe a point-of-sale system. Each one handles a different slice of the client relationship. Data ends up stuck in silos, and reconciliation becomes a nightmare.

Then there’s the actual cost of processing checks. On average, each one takes more than ten minutes to handle and costs between $7 and $10. But the real damage is the stretched-out cash flow cycle. Your client writes a check and mails it. It arrives days later. You open it, deposit it, and wait for the funds to clear. Every step adds days to your working capital cycle.

And then there’s the fraud risk. As Baxter put it, “Everybody’s focused on cybersecurity and compliance and risk, but when you actually fill out a check and mail it, your account number and routing number are on the check.” You’re basically handing anyone who touches that envelope the keys to your bank account.

So what does this actually cost? The industry average time-to-pay for service businesses is 35 to 40 days. If you carry $1 million in accounts receivable and get paid in 40 days, reducing that to zero would put the full million into your bank account immediately. Even cutting it by 50% makes a huge difference.

Invoices typically get pushed to collections agencies in the 90- to 120-day range, though nobody wants to send a client to collections. The estimated annual cost for a typical firm is about $35,000, split between manual billing time and the cost of delayed payments.

The current economy makes this more urgent. Rising bank fees, increasing debt defaults, and inflation-driven labor costs are squeezing margins. As Baxter framed it, “This is the time to ask what we’re doing as business owners, what we’re doing as operators, what we’re doing with our clients to help automate some of these workflows.”

Four levers cut collection times from 35 days to five

Alternative Payments has worked with over 1,000 customers, processing more than $1 billion in payments. Its team identified four specific strategies that produce real results.

Lever 1: Autopay enrollment

If you ask Baxter for the single most important thing you can do, his answer is immediate. “If anybody asks me, what’s the secret sauce, it’s autopay.”

Get a client’s credit card or bank account on file and get their permission to pull funds automatically when an invoice is due. You can set this up during contracting or offer a small incentive to encourage enrollment.

The numbers are clear. Manual online payers who receive a digital invoice and choose to pay it themselves still pay an average of 9.5 days after the due date. For autopay customers, it’s just 1.7 days. That’s about an 80% improvement from one workflow change.

Across Alternative Payments’ platform, 62% of all payments are now fully automated, meaning no human touches the transaction from invoice creation through bank reconciliation.

Lever 2: Automated email reminder sequences

This lever sounds simple, but the data tells the story. When companies enable automated reminders, payments arrive 1.8 days after the due date. Without automated reminders, payments arrive 6.1 days after the due date.

“It’s pretty intuitive,” Baxter said. “If you receive an email from your vendor that says, ‘Hey, you owe us money, obviously that makes it very top of mind.”

Think of it as Mailchimp for collections. The customized email sequence runs automatically. Different customer groups can receive different messaging. Reliable payers get gentle touches. Slow payers get more frequent follow-up. The system handles everything without your team drafting a single email.

Lever 3: Dynamic customer segmentation

Instead of treating every client the same, you tag customers into groups based on their payment behavior. Frequent, reliable payers get fewer reminders with lighter language. Clients trending toward collections get a weekly follow-up with customized messaging.

“Nobody wants to manage payments. I get it,” Baxter acknowledged. “But cash flow is the lifeblood of your business. And if you can take a data-driven approach to really target your customers and segment your customers, you can get paid much more quickly.”

You set the rules once, adjust as needed, and the system runs the campaigns automatically.

Lever 4: Integrated reconciliation

This lever eliminates the most tedious back-office work. Full-cycle reconciliation means marking invoices as paid while also matching bank deposits to specific invoices with supporting documentation.

Without this, a payment hits your bank, you pull it into QuickBooks or your ERP, and you manually match it to the right invoice. Multiply that by dozens or hundreds of transactions, and you’ve got a full-time job that adds zero value.

Baxter shared that earlier in his career, “Every single time we won a new deal, we would hire people offshore to do this manual reconciliation for us because we didn’t have a system that owned the process soup to nuts.”

The platform can pull accounts receivable data from multiple systems, including practice management, accounting, and ERP systems, into a single consolidated view. Automations then run against that complete picture.

These four levers together typically drive online payment adoption from 30% to about 70%. S1 Technology reduced its days’ sales outstanding by about 70% by increasing electronic payment adoption from 15% to 90% in three months. Triada, a company with no prior collection systems and 100% check payments, cut collection times in half.

The estimated time savings is about ten hours per week on billing alone.

What’s next: AI collections and beyond

During the Q&A, a participant asked, “Do you see AI eventually helping with things like predicting late payments or prioritizing collections?”

“A million percent,” Baxter answered.

Alternative Payments is deploying an AI collections agent that reads incoming client replies and drafts appropriate responses. Payment confirmations, scheduling conversations, and even basic dispute resolution can all be handled without a human drafting emails.

“Often, these emails that you get back are pretty monotonous,” Baxter said. “Hey, I’m going to pay my bill. Hey, thank you for the reminder. I’m paying in 15 days.”

The platform is also building predictive late-payment scoring using multiple data signals, including historical payment patterns, invoice characteristics, external news about clients, and even Dun & Bradstreet business data checks. You’ll know which clients need attention before invoices go overdue.

For the 30% of revenue that still arrives via direct wire or check, AI can now read bank feeds, identify deposits, and automatically match them to outstanding invoices. That last chunk of manual reconciliation work starts to disappear.

Looking ahead, Alternative Payments was preparing to launch accounts payable at the time of the webinar. The vision is a unified financial operating system with AR on one side, AP on the other, and reporting and analytics in the middle, all integrated into your existing software stack.

Many firms are discovering a new revenue stream. Those who previously avoided AR management because it was too painful now offer it as a service, charging clients hundreds to thousands of dollars per month for work that’s largely automated on the platform.

The company also offers a referral program with 10% revenue share for partners who bring in new customers, complete with a dashboard to track referrals and earnings.

Time to automate the monotony

Returning to the story that kicked off the webinar, if a $50 billion company can’t match a wire transfer to an invoice, it’s almost certainly happening inside your firm and your clients’ businesses, too.

As Baxter asked during the webinar, “Where do you want to focus your time? You want to focus your time on providing the best service to your clients. You don’t necessarily want to focus your time on the monotony of collecting, sending out emails, reconciling cash, and reconciling invoices.”

Watch the full on-demand webinar below to see exactly how these automation levers could transform cash flow for your firm and your clients.

How the Vatican’s Blessing Helped Hide $1.3 Billion in Missing Money

Earmark Team · April 25, 2026 ·

In June of 1982, a postal worker walking along the Thames in London noticed something hanging beneath Blackfriars Bridge. At first, he assumed it was construction equipment, like scaffolding or a tarp caught on a pipe. Looking closer, he realized it was a man, still wearing a suit, with bricks in his pockets and a rope around his neck. For a few days, nobody knew who he was. Then the name came out: Roberto Calvi. Suddenly, a lot of very powerful people were very interested in who was under that bridge.

That story opened a recent episode of the Oh My Fraud podcast. Host Caleb Newquist dug into one of the largest and strangest banking scandals of the 20th century, the collapse of Banco Ambrosiano and the unsolved death of the man they called “God’s Banker.”

In this story, institutional prestige became the most dangerous fraud enabler of all. When a bank’s credibility rests on religious authority, secret power networks, and cultural trust rather than transparent financials, $1.3 billion can vanish through circular offshore schemes while everyone assumes someone else must have checked the books.

How a Methodical Banker Became “God’s Banker”

Roberto Calvi wasn’t supposed to be a mysterious figure. Born in Milan in 1920 to a working-class family, his early life followed the same path as many of his generation: World War II, military service, and rebuilding from the rubble. He joined Banco Ambrosiano in the late 1940s as an entry-level hire. By all accounts, he was exactly what institutions want: diligent, methodical, and reliable. As Caleb puts it, he was “the kind of person institutions tend to reward because they don’t rock the boat.”

And for decades, he didn’t rock it. Roberto climbed steadily, and was promoted to general manager by 1971, and chairman by 1975.

Banco Ambrosiano was one of Italy’s largest private banks, with deep ties to Catholic financial networks. Italy’s banking has always carried layers of political influence, regional loyalty, and religious connections. Banco Ambrosiano sat comfortably within that ecosystem.

The most important relationship was with the Vatican Bank, officially the Institute for the Works of Religion, which, as Caleb notes, “sounds less like a financial institution and more like a retreat center, but it functions as a bank.” It handles investments, transfers, and assets for church operations worldwide. Banco Ambrosiano became one of its primary external banking partners.

That partnership was worth more than money; it was reputational gold. “If a bank is trusted to handle the Vatican’s money, then a lot of people are going to assume it’s safe,” Caleb explains. And that assumption is where the trouble starts.

The financial press started calling Roberto “God’s Banker.” It was shorthand for “this guy has some serious connections.” But the nickname also fused the bank’s identity with one of the most trusted institutions on the planet. Investors were buying into the idea of a bank backstopped by centuries of religious authority.

“Where there’s a very deep sense of trust, there’s often a lesser degree of scrutiny,” Caleb points out. “Not explicitly, but psychologically.” The reputation became the product. When reputation does the heavy lifting, the actual financial structures don’t get tested nearly as hard.

During the 1970s, the bank genuinely grew through international expansion, complex financial products, and global operations. Some of that growth was legitimate. But growth also meant operating in jurisdictions where oversight was, as Caleb puts it, “loose.”

Italian regulators raised eyebrows more than once at the complex corporate structures, foreign subsidiaries that were hard to track, and financial guarantees that weren’t always transparent. Individually, each could be explained. Collectively, they formed a pattern. But the God’s Banker halo did its job of absorbing questions that might have demanded harder answers.

The Machinery of Fraud: Circular Money and Comfort Letters from God

Over a billion dollars doesn’t go missing all at once. It happens gradually, through structures so layered that by the time anyone understands them, the money’s already gone.

By the mid-1970s, Banco Ambrosiano was expanding aggressively into international markets. Foreign subsidiaries multiplied across Luxembourg, the Bahamas, and Panama, where regulatory oversight was minimal. Some entities served obvious purposes, such as international lending, currency transfers, or supporting clients abroad. But others had extremely vague business descriptions and corporate structures so layered that tracing ownership took real effort.

According to Caleb, the core scheme worked like this: “Some of those offshore companies weren’t really operating like independent businesses at all. They borrowed money from the bank, made deposits back into related entities, issued guarantees to support loans made to other subsidiaries in the same network. Money moving in a loop that created the appearance of capital strength without much actually underneath it.”

Circular financing isn’t automatically illegal. Multinationals do inter-company lending all the time. “The problem starts when those underlying assets aren’t as solid as everyone assumes, because then what looks like strength is really just confidence shifting from company to company,” Caleb explains.

His metaphor nails it: “It was financial scaffolding. Scaffolding works great while the building’s going up. Less great when someone leans on it expecting a finished structure.”

The Vatican Bank’s letters of patronage kept people from leaning too hard. These were essentially comfort letters, or assurances that were, as Caleb jokes, “about as secure as the Lord’s blessing.” But banks and counterparties treated them as something stronger than they technically were. If the Vatican says it stands behind something, who’s going to push back?

The ecosystem around Banco Ambrosiano was getting darker. Michele Sindona, another Vatican-linked Italian financier, had already blazed this trail. His banking empire collapsed in the mid-1970s through similar aggressive financing and opaque offshore deals. He was convicted of fraud in the U.S., later convicted of ordering a murder, and died in prison in 1986 after drinking cyanide-laced coffee.

Then there was Propaganda Due (P2) officially a Masonic lodge. When Italian authorities raided it in 1981, the membership list included Italian cabinet ministers, military leaders, intelligence officials, judges, and media executives. Roberto’s name was there, too. P2 members called themselves “Frati Neri,” Black Friars. Yes, the grim coincidence: Roberto was found under Blackfriars Bridge.

“Membership alone doesn’t prove wrongdoing,” Caleb notes, “but it suggests proximity to power, and in finance, proximity to power can smooth scrutiny, accelerate deals, and sometimes delay uncomfortable questions.”

Add another red flag. In 1981, Roberto was convicted in Italy for illegally exporting currency. He received a suspended sentence but it was still a criminal conviction tied to financial conduct. “Prior financial misconduct usually justifies closer monitoring, not looser scrutiny,” Caleb observes. Instead, institutional trust filled the gaps.

By early 1982, roughly $1.3 billion was unaccounted for. That’s in early 1980s dollars. Investigators later found a 2,400-pound safe in a secret office. When they cracked it open, they found a handwritten list of gold and silver items. No actual gold or silver. Just the list. “A pretty fitting metaphor for the whole operation,” Caleb says.

On June 5, 1982, Roberto wrote to Pope John Paul II warning the bank’s collapse would “provoke a catastrophe of unimaginable proportions in which the church would suffer the gravest damage.” On June 10, he fled Italy with a fake passport under the name Gian Roberto Calvini, having shaved off his mustache. Communication became sporadic, then stopped.

Death Under Blackfriars Bridge and the Lessons Left Hanging

The day before Roberto’s body was found, Graziella Corrocher, Roberto’s 55-year-old secretary, jumped from the fifth floor of the bank’s headquarters. She left a note that said, “May Roberto be double cursed for the damage he has caused to the bank and all of its employees.”

“That doesn’t sound like someone caught up in financial technicalities,” Caleb observes. “That sounds like betrayal.”

As for Roberto, the path from “dead banker” to “unsolved murder” took decades. The initial ruling was suicide. A 1983 inquest returned an open verdict. In 1998, authorities exhumed his body. Forensic analysis found neck injuries inconsistent with hanging and no traces of scaffolding paint, rust, brick dust, or limestone under his fingernails, evidence you’d expect on someone who climbed there himself. By 2002, Italian courts ruled it a homicide.

In 2007, five defendants including alleged Mafia figures went on trial. After twenty months of testimony, hundreds of witnesses, and mountains of forensic evidence, the judge threw out all charges for insufficient evidence. The public prosecutor said, “Roberto has been murdered for the second time.”

After negotiation and public pressure, the Vatican contributed between $224 and $250 million toward creditor settlements. The church framed it as a moral gesture, not an admission of legal liability. Caleb describes it as “the financial equivalent of saying we didn’t do anything wrong, but here’s some money anyway.”

What Accounting Professionals Should Take From This

Caleb closes with five key lessons from the wreckage:

Institutional trust is not a control. A respected name doesn’t guarantee sound financial structures. “A good reputation can chip away at skepticism, and reduced skepticism is exactly where fraud tends to thrive. People assume that someone must have checked.”
Complexity is not the same as sophistication. “Sometimes complexity is necessary, but it’s also camouflage.” If understanding the structure takes longer than anyone’s willing to spend asking questions, that’s probably a red flag.
Prior misconduct deserves attention. Roberto’s 1981 conviction didn’t doom the bank, but it should have triggered closer monitoring. Instead, institutional trust papered over a conviction that should have triggered alarm bells.
Liquidity crises expose accounting illusions extremely quickly. “A lot of frauds don’t collapse because someone discovers them. They collapse because cash gets really tight.” When creditors want repayment instead of extending credit, reality tends to win.
Fraud rarely happens in isolation. “This wasn’t just one banker making bad decisions. It was a network.” Most frauds reveal a rotten system, not just one bad apple.

The Banco Ambrosiano scandal is ultimately about how prestige substitutes for scrutiny. Four decades later, we still don’t know who killed Roberto Calvi. We do know what killed Banco Ambrosiano: a system where reputation did the work that controls were supposed to do.

Every era has its version of institutions where reputations function as a get-out-of-scrutiny-free card. The vehicles change, but the dynamic stays the same. When trust replaces verification, fraud finds room to grow.

Listen to the complete episode of Oh My Fraud for the full story, including the prequel villain who died from prison coffee, a safe full of nothing but lists, and a mustache shave that fooled no one.

And remember Caleb’s parting advice: if the chairman of your bank ends up hanging under a bridge named Blackfriars, you’re probably not having a normal quarter.