» 2 tax forms that invite IRS snooping

2 tax forms that invite IRS snooping

June 12, 2008 by Carol Katarsky
Posted in: 1099s, Best practices, In this week's e-newsletter, IRS regs, Latest news & views, Tax compliance

If you’re looking for a quick way to meet an IRS auditor, there may be no quicker way than issuing a 1099 and a W-2 to the same worker in the same year.

You may not do it often, but it’s common practice when a worker retires or quits and then comes back as a “freelancer” or independent contractor. It can also happen if a temp or freelancer is eventually hired on full-time as an employee.

The practice gets IRS’s attention because the Service assumes the two “jobs” performed are similar and that the “contract” position was actually a misclassification of someone who is actually an employee.

IRS is increasing enforcement of these kinds of errors, so if you feel you’ve issued a 1099 and W-2 to the same worker properly, be prepared to back that up.

It can work only if:

  1. The two jobs are truly different in nature. Example: An administrative assistant works for an executive during the week, but take occasional side projects on the weekend doing graphic design for your company. The two jobs are unrelated and treated separately, so you could safely issue a W-2 for her “regular” job and a 1099 for the sideline.
  2. A returning worker’s status has truly changed. If the two jobs the worker performs are similar, you’ll need to document that your company now has less control over the worker, that he or she is available to work for other companies as well, that he or she has can either increase profit or risk a loss, etc.
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