October 17, 2013
I have employees who wear two different hats. For part of the workweek, they are really employees, under my direction and control. But, at other times, they serve as independent sales consultants for my business on a straight commission basis. I do not supervise them at all when in the field. I let them set the prices and make contracts on my behalf. My question is whether I can give them 1099s for the independent contractor part of their income and W2s for the employment part. Otherwise, I will have to pay the social security and Medicare taxes AND, counting those independent contractor hours, I will be required to offer them health coverage under the Affordable Care Act or pay a penalty.
Dr. T, good question, and one I know many reading face. Since we now have an in-house industry expert, I've asked Judge Ruth Kraft to take the lead on this one and provide our answer:
By Judge Kraft -
Thank you for a very important question. It is one that I have been asked by clients repeatedly this year. Assuming that, when acting as salespeople, these individuals fulfill the indicia of independence, the truth is that this would give rise to 1099 income. However, you are in a bind. If you treat the same worker as both a W2 employee and a 1099 independent contractor in the same calendar year, you are virtually guaranteed audits by the Internal Revenue Service and the state department of labor. Even if you can make out a case, audits are costly, time consuming and expose your operations to unwarranted scrutiny. Therefore, despite the merits, I do not recommend that your organization classify the same person in two different ways. Under these circumstances, evaluation of reclassification strategies is appropriate. We are definitely charting new waters with respect to the Affordable Care Act as well. There is no doubt that government wants to classify as many workers as possible as employees both for health coverage and to increase the amount of social security, Medicare and unemployment taxes flowing into the system.
One recent case in the US Tax Court did recognize the possibility that an individual could be both an independent contractor and an employee but the circumstances were unusual. The employee was a radio personality and program director; there was no dispute that this constituted covered employment. However, in order to drive revenues, he negotiated sponsorships directly and promoted sponsors’ products and services on the air. The radio station had no input in his advertising campaign but did review the scripts for potentially fraudulent representations and vulgarities. The Tax Court 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. (Ramirez v. Commissioner, May 20, 2013)
Notwithstanding the outcome in Ramirez, this is a risky position to take. The cost of taking a case into the Tax Court is significant and, since many employment scenarios fall into gray areas, the outcome is unclear. The resources required, both in terms of money and time, cannot be underestimated. Employers can use other strategies to mitigate the costs of covered employment. Each situation is unique but all require careful planning. I will add that compliance has become a moving target these days; a strategy which might have passed muster two or three years ago should not be taken at face value at this time.
If you have an employment related or classification question, feel free to contact Judge Ruth Kraft, chair of K&K's Employment Law Group at RKraft@Kirschenbaumesq.com or contact her by phone at (516) 747-6700 ext. 326. Judge Kraft honors our healthcare practice and provides free initial consultations and reduced rates for all listserv members. Can't reach Judge Kraft with an important employment issue, you can always contact Jennifer to discuss at Jennifer@Kirschenbaumesq.com or at 516 747 6700 x. 302.