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Old 04-28-2013, 09:18 PM
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Employee Receiving 1099 and W2? Complex Question

Hi, I think I have a unique situation...

I run a small business that connects people wanting to learn music or art with teachers in the field. All of the teachers are freelancers, and get paid as independent contractors (1099).

I have one employee (W2) who does admin work (answering phones & email), 14 hrs a week. Being an art grad, on her off days, she took on a few art students as well. She has had experience freelancing lessons, and had done it at other venues around the city as well.

Well, she's currently stopped accepting contract work from us, as she's doing too much contract work for other places now and doesn't have the time. She's still an admin employee for us.

I thought this was fine, until someone warned me that her receiving a W2 and 1099 from my business in the same year would be a big IRS red flag. She will have made a total of $620 doing contract work for us over the entire year of 2013, so not that much really.

Now, we do everything by the books-- all of our contractors set their own hours, give us invoices for their work, use their own stuff. We do have a space they can use for lessons, but they don't have to and many choose to teach in their own or other spaces. But still, no one likes the prospect of an audit.

So I guess my question is, at this point, is there anything I can do to minimize the risk of an audit? She's already done the contract work, so what's done is done, but would it be better to somehow transfer those funds to be reported on her W2? Or is it better to just leave it be? I've heard that the IRS looks closely at businesses with independent contractors (we have about 15 and one admin employee).

This situation is new to me, so I appreciate any advice!

Thanks!


Last edited by carbs : 04-28-2013 at 09:27 PM.


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Old 04-29-2013, 10:27 AM
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“So I guess my question is, at this point, is there anything I can do to minimize the risk of an audit? She's already done the contract work, so what's done is done, but would it be better to somehow transfer those funds to be reported on her W2? Or is it better to just leave it be? I've heard that the IRS looks closely at businesses with independent contractors (we have about 15 and one admin employee).”==========> The main difference between the W-2 and the 1099 is the type of income that is reported.So as long as they're two different jobs, you can definitely write separate checks ; not a legal requirement , but will keep the accouting cleaner, and probably save lots of headaches down the road. Or( if you issue her , an EE, 1099 one time, it ‘d be OK as the EE reports it on 1040 line 21) Taxes will be deducted from the W-2 on adm job but not from the 1099 tutoring.In general, the IRS doesn't like to see habitual W2's and 1099's coming from the same company, ER, to the same person in the same year. In their thinking, you cannot have two different relationships with the same person at the same time. I guess you can contact the IRS for more info in detail.



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Old 04-29-2013, 05:04 PM
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Originally Posted by Wnhough View Post
“So I guess my question is, at this point, is there anything I can do to minimize the risk of an audit? She's already done the contract work, so what's done is done, but would it be better to somehow transfer those funds to be reported on her W2? Or is it better to just leave it be? I've heard that the IRS looks closely at businesses with independent contractors (we have about 15 and one admin employee).”==========> The main difference between the W-2 and the 1099 is the type of income that is reported.So as long as they're two different jobs, you can definitely write separate checks ; not a legal requirement , but will keep the accouting cleaner, and probably save lots of headaches down the road. Or( if you issue her , an EE, 1099 one time, it ‘d be OK as the EE reports it on 1040 line 21) Taxes will be deducted from the W-2 on adm job but not from the 1099 tutoring.In general, the IRS doesn't like to see habitual W2's and 1099's coming from the same company, ER, to the same person in the same year. In their thinking, you cannot have two different relationships with the same person at the same time. I guess you can contact the IRS for more info in detail.
Thanks for the reply. It's most definitely separate work, so I guess it should be kept on the 1099. (I'm not sure the difference of the EE, would that be better for my situation?)

Also, I know you said that IRS doesn't like habitual w2s and 1099 to the same person, but this is the first time it will be happening, so it should be ok? I just want to make sure I'm doing everything in the best possible manner.

Thanks!



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Old 04-29-2013, 05:45 PM
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“It's most definitely separate work, so I guess it should be kept on the 1099. (I'm not sure the difference of the EE, would that be better for my situation?)”=====================> It is critical that business owners correctly determine whether the individuals providing services are EEs or independent contractors. Admin work and tutoring done by the same EE for the same ER , I guess, is not definitely separate work. You cannot have two different relationships with the same person at the same time.
As said, “In general, the IRS doesn't like to see habitual W2's and 1099's coming from the same company, ER, to the same person in the same year.”================>The IRS may think that you try to avoid paying FICA or other taxes by issuing your EE both W2s and 1099s. In lieu of issuing only W2s. An ER's tax liability is determined by the worker's employment status. When a worker is an EE, you must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to a State Insurance Fund. When a worker is an independent contractor, the hiring party is not required to make any of these payments.
“Also, I know you said that IRS doesn't like habitual w2s and 1099 to the same person, but this is the first time it will be happening, so it should be ok? I just want to make sure I'm doing everything in the best possible manner.”==In this case, I general, your EE needs to report 1099 income on 1040 line 21 UNLESS the EE incurs deductible work (biz) related expenses. However, as long as the EE incurs deductible biz expenses, then the EE needs to file Sch C/Sch SE as long as the amount on Sch C line 29/31 is $400 or exceeds $400 or as long as the amount on Sch SE line 2/ 3 is also $400 or exceeds $400.As said, you can contact the IRS for more info in detail.



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Old 04-29-2013, 06:18 PM
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Originally Posted by Wnhough View Post
In this case, I general, your EE needs to report 1099 income on 1040 line 21 UNLESS the EE incurs deductible work (biz) related expenses. However, as long as the EE incurs deductible biz expenses, then the EE needs to file Sch C/Sch SE as long as the amount on Sch C line 29/31 is $400 or exceeds $400 or as long as the amount on Sch SE line 2/ 3 is also $400 or exceeds $400.As said, you can contact the IRS for more info in detail.

Thanks for your help. Since the amount of the 1099 will only be $600, it really shouldn't look as if I am attempting to skirt paying taxes, as it would be such a small amount. I guess my question was if it would be better to somehow add the IC payments to her paycheck, and just pay the employee tax on it to be safe. But on the other hand the teaching work she did really wasn't as an employee, so it wouldn't be a true representation of the work.

In your experience, does a small and one-time 1099 to an employee who also gets a w2 trigger a red flag from the IRS, if all the rules have been followed? I had someone in a similar business as I am in tell me that issuing the 1099 is a big mistake, but it seems like the only option to me...



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Old 04-29-2013, 06:32 PM
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In your experience, does a small and one-time 1099 to an employee who also gets a w2 trigger a red flag from the IRS, if all the rules have been followed?============> I do not think so; however, as said previously, the EE , UNLESS he incurs tax dedcutible exp, needs to report the 1099 income on 1040 lien 21.



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Old 05-01-2013, 10:14 AM
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note:in common sense, as you cna see, when payor records, such as Forms W‐2 or Form 1099, don’t match the
information reported, then it can be subject to IRS audit.



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