Updated October 6, 2020
Can an individual that is working for us be both an employee AND an independent contractor?
According to IRS guidelines, it is possible to have a W-2 employee who also performs work as a 1099 independent contractor so long as the individual is performing completely different duties that would qualify them as an independent contractor.
Some legitimate examples that we have seen of this circumstance are:
- A Receptionist who also owns a cleaning service business with their spouse: The company contracts with the team to perform janitorial services after hours for the office.
- A Sales Manager also performs graphic design work for several local businesses after hours: The company contracts with the individual to create a new logo for the company.
- A Maintenance Technician also owns a fabricating business of their own: The company contracts with the individual to fabricate equipment for the company.
- A custodian who works for a county public school: The county views him as an employee and issues him a Form W-2 for these services. He also owns and operates a business that provides snow plowing services on nights and weekends. The county contracts with the individual to provide snow plowing services.
An employee owning their own business is not a requirement, but rather one of the factors to consider when determining if someone may be properly classified as an independent contractor. If you feel confident in the IRS criteria on the whole, you may classify their separate work as independent contractor work. Employers must be sure they fully understand the DOL criteria that distinguish contractor versus employee!
Criminal penalties and liability for backpay may be imposed against organizations and leaders if FLSA laws are violated. The DOL has recently concentrated on employer misclassification of independent contractors. Additional auditors have been engaged to direct their attention toward this area of compliance.
It is widely believed among tax professionals that having a worker receive both a W-2 and 1099 increases the likelihood of an IRS audit.
NOTE: In the same timing as this article was rewritten, the DOL has proposed rules that Secretary of Labor Eugene Scalia indicated will “bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act.” strategic HR inc. will provide updates once the new regulations are finalized.
strategic HR inc. knows that keeping abreast of legal compliance issues can be daunting, especially when the laws keep changing. We can help you stay compliant by fielding your questions regarding properly classifying your employees and other HR matters. We offer resources to help you identify and mitigate compliance issues. Visit our Legal Compliance & Recordkeeping page to learn about our auditing services which can help you identify trouble spots in your HR function.