The official IRS position is that “facts and circumstances” always dictate how a worker is “classified” for employee (W-2) or independent contractor (1099) purposes. A person can be both an employee and an independent contractor if their “sideline services” are not part of their regular job duties. We have read that issuing both a W-2 and 1099 in the same time period to the same individual can cause a “red flag” to the IRS, but it doesn’t necessarily mean that a client will be selected for an audit.
The Federal Tax court case, Ramirez V. Commissioner, stated “that the fact that a person is an employee in one capacity does not foreclose the possibility that he can be an independent contractor with the same employer in another context”.
Examples of people who correctly should be given both a W-2 and a 1099 in the same year are:
–An employed dental assistant asks if she can clean the dental office on the weekend. She is paid a fixed weekly fee, uses her own supplies, and chooses the time from Friday PM to early Monday AM to clean the office.
–An employee of a surveying firm bids to provide lawn mowing services for his employer’s office building as part of his separate side business.
–A store manager is a musician and is paid to perform at the employer’s Christmas party.
To further solidify the relationship, we suggest having individuals sign an employment agreement for employee duties and an independent contractor agreement for other duties. This could help solidify the working arrangements if the IRS ever comes knocking.