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!