global Tax Can an Employee Receive Both a 1099 and W-2 in the Same Year? January 31, 2022 Do you employ both salaried workers and freelance workers? Filing taxes can be a bit complicated. Here’s what you should know about giving employees form 1099s and W-2s in the same calendar year. First off…what’s the difference between a 1099 and W-2? Form W-2 is used to report annual wages earned by an employee and any withholdings from income. Form 1099-NEC is provided to freelance workers who are paid $600 or more in non-employment income during the tax year. Can you give employees both forms in the same year? Yes, but this situation could warrant attention from the IRS. What are the IRS guidelines for issuing both forms in the same year? The IRS will consider three factors in this situation: Whether or not the worker was treated as an employee for part of the year and an independent contractor for a separate part of the year.If the worker was performing two or more distinct services and was considered an employee for one service and an independent contractor for the other service.If the payment reported on Form 1099-NEC represents additional compensation to the worker for which they received compensation reported on the W-2. Unless there is evidence to the contrary, the IRS will presume that a worker is an employee because the required tax withholding from an employee’s paycheck is the main method the IRS uses to enforce individual tax collection. To be considered an independent contractor, a worker must meet certain standards (through an IRS “test”). Questions in this test fall under the following three categories: Behavioral- Does your organization have the right to control the worker and how that person performs his or her duties? Financial- Is there a written contract between the worker and your organization? Does the worker receive employee benefits? Are the business aspects of the worker’s job regulated by the payer? (How the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of Relationship- Are there written contracts or employee type benefits (i.e. insurance, pension plan, vacation pay, etc.)? Will the relationship continue and is the work performed a crucial piece of the business? Example -- Does the worker have to follow another employee’s instructions when completing a project? If that’s the case, the worker is likely classified as an employee. Other helpful indicators: Generally, employees are: Trained for a specific purpose/job Paid by the hour, week or month Typically, independent contractors are: Already trained on how to do something Required to pay their own assistants Able to set their own daily schedule and hours Working at more than one company at a time As a rule, any person to whom your company has paid the following amounts during the year should receive a Form 1099-NEC: A minimum of $10 in royalties or broker payments in place of dividends or tax- exempt interest. A minimum of $600 in rents, services from someone other than an employee, prizes, awards, medical payments, crop insurance proceeds, cash payments for fish, fishing boat proceeds, or payments to an attorney. Example Susan is retiring from her accounting job in January but will continue to do some consulting work for her former employer moving forward. She is retiring in January, so she will have a W-2 in 2022, but once retired and when she becomes a consultant, she will need to receive a 1099 as well. In this situation, a contract should be written up that documents the amount that will be paid for consulting work, the length of the term of the work, and a termination clause. In addition, consulting work should be invoiced every month to document the consulting relationship. This will help if the IRS were to question the situation. The IRS is concerned when you are paying someone via 1099 and still treating him/her as an employee, it is crucial to document that Susan isn’t an employee through the signed contract and invoicing. Questions on your reporting obligations? We can help.
