Query: Can an organization difficulty each a Type 1099 and a Type W-2 to a employee in the identical yr, or is that this a crimson flag for the IRS?
Reply: The Type W-2, Wage and Tax Assertion, is used to report wage revenue. The Type 1099 sequence is used to report nonwage revenue. Usually, if the work and the working relationship between the employee and the corporate are primarily the identical, then all revenue must be reported on the identical kind. Nonetheless, conditions exist by which issuing each kinds to the identical particular person could also be applicable.
Employees could also be labeled as common-law workers, statutory workers, statutory nonemployees, or impartial contractors. Some compensated actions don’t rise to the extent of employment or of a commerce or enterprise. For instance, compensation for taking part in a medical analysis examine is taxable however just isn’t usually thought of to be employment, a commerce, or a enterprise. Such funds are reported on Type 1099-MISC, Miscellaneous Earnings.
Usually, common-law workers and statutory workers obtain a Type W-2, and statutory nonemployees and impartial contractors obtain a Type 1099-MISC or Type 1099-NEC, Nonemployee Compensation.
The 4 lessons of statutory workers are described in IRS Publication 15-A, Employers Supplemental Tax Information. Statutory employment standing is contingent upon particular situations. The employees are handled as workers for Social Safety, Medicare and FUTA functions, however they’re handled as nonemployees for revenue tax functions. Whereas compensation is reported on Type W-2, no revenue tax is withheld, and the employee stories the compensation on Type 1040 Schedule C, Revenue or Loss From Enterprise (Sole Proprietorship).
Three lessons of statutory nonemployees are additionally described in Publication 15-A. Such employees are handled as nonemployees no matter any common-law components. Impartial contractors are nonemployees below the widespread legislation. Each teams ought to obtain Kinds 1099 reporting their compensation.
Typically a selected employee could fall into multiple classification for a selected employer.
Frequent-law worker and impartial contractor: An organization discovers that considered one of its bookkeepers is an artist and commissions the particular person to create a portray for the corporate reception space. The corporate ought to difficulty the employee a Type W-2 reflecting the wages earned as workers bookkeeper and a Type 1099-NEC reflecting fee to an impartial contractor for the paintings.
Frequent-law worker and statutory nonemployee: A licensed actual property agent splits time at a brokerage working part-time in gross sales and half time as a receptionist. For the work in gross sales, the employee is assessed as a statutory nonemployee, and the brokerage would report revenue on Type 1099-NEC. For the work as a receptionist, the employee can be a common-law worker, and the corporate would report the revenue on Type W-2.
Frequent-law worker and self-employment: A self-employed plumber often makes plumbing repairs for a neighborhood school. Throughout the identical yr, the plumber is employed as an adjunct college member within the school’s expert trades program. The faculty ought to difficulty the employee a Type 1099-NEC for the contract plumbing work and a Type W-2 for the school work.
Frequent-law worker and unrelated revenue: A pupil is enrolled in a program that entails work-study and is paid by the school. That very same yr, the coed receives a taxable award for educational excellence that’s impartial of the employment. The faculty ought to difficulty the coed a Type W-2 for the work-study and a Type 1099-MISC for the tutorial award.
There are conditions by which issuing each a Type 1099 and a Type W-2 to the identical employee is inappropriate. Usually, that is completed to scale back the employer’s tax burden by treating employment as nonemployment.
A retail salesperson is paid wages and commissions. The employer stories the wages on Type W-2 and the commissions on Type 1099-NEC. This isn’t in compliance as a result of the wages and commissions are each compensation paid to a common-law worker. For workers, all types of compensation are thought of wages for reporting functions. This consists of hourly wages, wage, bonuses, commissions, noncash compensation, and taxable fringe advantages.
An employer has money stream issues and converts all workers to impartial contractors for the fourth quarter, paying their common web pay quantities and reporting the funds on 1099-NEC kinds. The pay for the primary three quarters is reported on Kinds W-2. The employees carry out the identical duties below every fee scheme; so, the staff are nonetheless common-law workers. All earnings ought to have been reported on Type W-2. On this scenario, as a result of the employer paid the employees their common web pay, the employer additionally successfully withheld worker taxes and didn’t pay them to the IRS, which is a separate offense.
The road between common-law employment and common-law nonemployment just isn’t at all times clear. An employer may inadvertently deal with widespread legislation workers as impartial contractors. If the employer acts in good religion and stories the funds by issuing the suitable Kinds 1099 to the employees, the employer may be capable of depend on particular guidelines to mitigate penalties within the occasion the employees are reclassified as workers.
This column doesn’t essentially mirror the opinion of Bloomberg Trade Group, Inc., the writer of Bloomberg Legislation and Bloomberg Tax, or its homeowners.
Patrick Haggerty is the proprietor of a tax apply in Chapel Hill, North Carolina, and an enrolled agent licensed to apply earlier than the Inside Income Service. The creator could also be contacted at email@example.com.
Do you’ve gotten a query for Payroll in Observe? Ship it to firstname.lastname@example.org.