As an CPA firm, we work closely with small companies, nonprofits and local government, one of the most frequent but overlooked questions we get is:
Can you issue the W-2 and 1099 for the same individual within that same calendar year?
The simple solution is “yes” but in certain circumstances. The issue of both forms is legal if handled properly, but it can lead to IRS investigation if it is not applied correctly. In this article we’ll go over why it’s okay, the dangers of not doing it correctly and the best way to remain in compliance.
Understanding the basics of W-2 vs. 1099
Before we get into the details of how you can issue both, Let’s look back at the goal that each one serves:
- Form W-2: Issued to employees. It is used to report tips, wages and other compensations that are withheld from tax withholding for state and federal taxes as well as Social Security, and Medicare.
- Form 1099-NEC: Provided to contractors who are independent or not employees. It lists any compensation exceeding $600 in exchange for services, but not withholding tax.
Generally, if someone is an employee, the entire compensation amount should be reported to the W-2. You do not need to issue a 1099-NEC for that identical work.
When It Is Appropriate to Issue Both
Although this isn’t a common practice however, there are legitimate situations in which a government or business entity could require issuance of both a W-2 and 1099 to the exact same person.
1. Separate and Distinct Work Roles
It is the most common situation that is legitimate.
Example:
Let’s suppose you hire one of your employees as a part-time worker during the week to take care of administrative tasks. In addition, the same employee has a business of their own and you contract them separately to revamp your website.
- The wages of their employees (admin work) appear through an official W-2.
- The contractor’s payment (web designing services) is 1099-NEC. It is issued to their personal or business SSN depending on the way they were contracted.
The IRS permits this, as it is clear that both roles remain separate, the legal connection for the 1099 has been documented and there’s no overlap of responsibilities.
2. Status Change During the Tax Year
Another reason that can cause both forms to be issued is if an individual’s job status changes mid-year.
Scenario:
A non-profit organization hires someone on an employment basis for the initial one-half of each year. After June, the person leaves and is hired to work as a freelance contractor who will consult on an event or special project.
- Payrolls from January to June – reported on the W-2.
- July-December consulting fees – reported on 1099-NEC.
This is appropriate because the legal relationship between the individual and the business changed in addition, the quality of service changed in the second quarter of the year.
3. Special Circumstances in Government or Nonprofit Settings
In the field of government and non-profit work, you might face unique staffing requirements.
For instance, a teacher at a public school (employee) may also have an additional business or be employed to host entertainment or even photography at school events. So long as the relationship with the vendor is separate from teaching duties, the issue of a 1099 is a valid option.
When You Should NOT Issue Both Forms
After we’ve discussed the right usage scenarios, let’s discuss what to avoid doing.
1. Never Split Wages Between W-2 and 1099
Some employers try to dodge taxation on payroll by claiming a portion of the employee’s salary as compensation for 1099. This is a violation of the law.
Example:
An employer pays its employee a salary based on a W-2 but gives them a 1099 to pay for “bonus” or extra hours in order to avoid paying tax on this portion. The IRS examines this as a wage misclassification and could impose penalties for penalties, back taxes and interest.
2. Don’t Use a 1099 to Report Employee Bonuses or Perks
Any compensation relating to an employee’s tasks, stipends and bonuses or reimbursements must be reported on a Form W-2. Even if the bonus was only a one-time expense is still considered an employee’s earnings.
3. Don’t Issue a 1099 If the Worker Is Clearly an Employee
The use of a 1099 in order to avoid obligations of employment (like tax withholding or benefits) is an alarm for IRS auditors. If an individual is in compliance with IRS requirements for being an employee, such as being directed, scheduled and supervised by you, then the only option is a W-2.
How to Stay Compliant: Best Practices for Employers
In order to ensure that you’re not using the incorrect forms, here are some essential guidelines to follow:
Document the work relationship Clearly
Make separate written agreements that outline the work scope for each job, employee or contractor. Employ a different company address or tax identification number when contracting services in the event that it is appropriate.
Keep Payment Records Separate
Pay wages to employees through your payroll system. You can also pay contractors through accounts payable. This makes the year-end report more precise and defensible.
Use IRS Form SS-8 If You’re Unsure
If you’re unsure of the classification of a worker, submit Form SS-8 to the IRS. They’ll examine the facts and then make a formal determination. This is particularly helpful for nonprofits and government entities which are constantly changing their hiring models.
Final Thoughts
The issue of a W-2 as well as 1099 to the same person is appropriate, provided that the duties are clearly distinct, legally justified, and documented properly.
We are Parr & Ibarra CPA, we assist our clients in the following areas:
- Avoid costly classification mistakes
- Structure dual-role agreements correctly
- Explore the complicated IRS rules with confidence
If you’ve come across a situation in which one employee is a multi-tasker or has multiple statuses or responsibilities, or you’re unsure of how to report their income, ask your CPA before distributing forms. Just a few moments of advice could save you thousands of dollars in fines later.
Need Help?
We’re here for you to help remain compliant and secure. Call us today for customized payroll and tax-related support.
