1099 and W2 to same person?

[midjd]

I work for a state agency and supervise ~50 independent contractors who are issued 1099s from the state. They are genuine ICs -- they have almost total discretion as to when/how their work is completed.

I was recently notified that two of these contractors are employed as W2 employees with other state agencies, so that they have received both W2s and 1099s from the state. Apparently this is a big red flag and now the state will likely want their contracts terminated.

I'm not that vested in these two specific contractors, but am supposed to meet with our director in the next couple of weeks to figure out what to do, and thought I'd run it by this board first. I haven't delved too deeply into research, other than Ramirez v. Commissioner. In this situation, I think the argument is even stronger, since these contractors are employed with completely separate agencies that perform different functions, and are performing their contract duties while "off the clock." Is there any workaround here?

Thanks in advance for any advice/guidance!

[taxref]

Its generally a tough sell when an employee receives both a W-2 and a 1099 from the same business.  The IRS will usually claim the person is an employee.  However, that can be rebutted.  Your situation, though, is different (and probably much more favorable) than that of small businesses.

You have the ability to show that, while the person is paid by the state, he is actually doing work for different autonomous agencies.  If the ICs do completely different work from their W-2 jobs, that would help.

I would think you have a good case for paying them both as employees and ICs.  The problem becomes, if their classification is challenged, how willing would the state be to battle with the IRS.  

 


 

[mroped]

To me as a contractor that is quite easy to prove both W2 and 1099.

For the W2 you are employed on a preset schedule with conditions spelled out in the contract: working hours, benefits etc.
For the 1099 there is just the description of the project that needs to be done as far as what materials to be used, how it needs to be executed, an estimated finish/completion date and the amount that will be paid upon completion.
As long as there is no specification of a time schedule that would conflict with the time that they are paid on W2 then all is fine.

I personally cannot tell or expect my employees not to do anything "on the side" in their own free time as long as that does not interfere with the doing of their job with me.

Basicaly, I cannot tell my employees what to do after 4pm, Saturday's, Sunday's and legal holidays. That is their private business.

There is no law prohibiting one from working 80-100 a week!

[taxref]

"For the 1099 there is just the description of the project that needs to be done as far as what materials to be used, how it needs to be executed,..."

You could have a serious problem, especially with the "how it needs to be executed."  That would constitute control, which is the primary factor in determining that a person is actually an employee.


"As long as there is no specification of a time schedule that would conflict with the time that they are paid on W2 then all is fine."

I would have to disagree.  The IRS and the courts use an entire series of factors to determine whether a person is an employee or a contractor.  Each factor is weighed independently.  

"There is no law prohibiting one from working 80-100 a week!"

But there are laws which prohibit an employer from not paying overtime to employees who work in excess of 40 hours per week, and not withholding and matching payroll taxes from employees.   Improperly classifying employees as contractors can result in devastating financial consequences to a small business, and its owners.

[mroped]

First, "the description of the project..." could come from say the owner to the general contractor whom just pases that onto the subcontractor- receiver of 1099. Is typically spelled out in detail in the primary contract by the designers/engineers/architects. Otherwise known as "Speciffications"!

"...time schedule that with conflict..." meaning that if you are employed in a job say from 8 to 4 and receive for that a W2, you cannot complete a project as a subcontractor on the same time frame. There are by the way contracts that specify that " work shall be completed only Monday throug Friday between the hours of 8 and 5" or something similar.

"there is no law prohibiting one from working 80-100 hours" - if I work my regular schedule 8-4 for five days a week I get my 40 hrs on W2. Leave my day job and go on a different where I am the "subcontractor" not the "employee" and work for a few more hours. Throw in there weekends and you can easily get to 100hrs.  Easy- peasy!

Does in such a case IRS still has a case?
Can one/the law/IRS tell me that I cannot work two jobs or more?

Do you think that the IRS or any government entity care about how many hours I work every week as long as I paid my taxes?
I beg to differ!

[endofera]

Regardless of the IRS, does the state already have any rules about this? As a taxpayer, I'm wondering if the contractor was hired because of the day job at the state rather than going through a bidding process or other hiring procedures.

I'd also be very concerned whether this individual's hours overlapped. 

To me, it's a red flag for fraud.  Not saying there is fraud occurring but it's a red flag.

How was it even discovered?  Is there a systems check at the state that matches up SS#s of W-2s and 1099s?  

[taxref]

Mroped: When it comes to taxation, there are many who believe their own reasoning overrides established law.  Those people, though, should be careful to understand that they are not tax experts.  Rather, they need to recognize they are simply playing audit roulette.  

MIdjd: Endofera does bring up good points, even though they are not related to the issue of how the IRS would view your situation.   News articles about people getting more than 1 check from the state are not uncommon where I live.  It always makes for bad publicity for the state. 

[midjd]

Thanks for the responses!

I would think you have a good case for paying them both as employees and ICs. The problem becomes, if their classification is challenged, how willing would the state be to battle with the IRS.

I agree on both counts -- I think there's a good argument but I doubt the state is willing to take it up.

Regardless of the IRS, does the state already have any rules about this? As a taxpayer, I'm wondering if the contractor was hired because of the day job at the state rather than going through a bidding process or other hiring procedures.

How was it even discovered? Is there a systems check at the state that matches up SS#s of W-2s and 1099s?

In both cases, the contractor was hired by us before getting a job with the state. One ended their contract with us upon getting a FT job, but since it was mid-year, got both a W2 and 1099 for 2014. The other worked part-time at the W2 job and on contract with us. We pay on a piecework basis, not by hour, but it was probably <2 hours a week of work for us. There should have been no overlap, but I agree it could look fishy from the outside. 

I have no idea how it was discovered. I would think there would be something in place at the auditor that would flag the same SS number being paid from two entities before a W2/1099 was even issued, but maybe not. I'm also not sure if it is now a problem for any state employee to be hired mid-year, or if there's some kind of exception for contract-to-hire employees... 

[mroped]

What you describe here seems pretty straight forward. Looks legal and easy to explain.
Is there a chance of an IRS audit? Sure, there is always one for that but that doesn't mean that people stop working.
The IRS is meant to randomly check and see if taxes and dues to government are paid according to the law.
If one decides to skirt the law then that is a chance that he takes.
If all pays are made legally and in good faith there is no reason to fear anything.

Why do people see IRS as the big bad wolf I have no understanding of.

[rangerj]

Note: Many state, local, and federal governments place a restriction on the number of hours an employee may work per week at an "outside" job. This state employee can be a legitimate independent contractor and should set up an "entity", such as a corporation or LLC, and avoid some of this "DRAMA". A 1099 issued to an entity could eliminate the controversy.