Re: Consultants (IRA 1099) vs Employees (IRS W-2) Wolterman, Ken (WOLTERK) 14 May 2002 13:00 EST

I shared this with our tax compliance person here at the University of
Cincinnati and here was his response:

In my opinion, the accounting department in Alabama's scenario is being too
conservative.   They are correct in being CAUTIOUS about issuing a W-2 and a
1099-MISC to the same individual in the same year, but there's nothing
inherently WRONG with it.  It's just a "yellow flag" for a potential IRS
auditor to look for.  In UC's last audit, one of the things our auditors
requested was a list of everyone who got both a W-2 and a 1099-MISC in a
given year.

The judgment will be based primarily on the nature of the work being done,
and whether people in similar roles are being treated as contractors or
employees.  In the Alabama case, I'd have no problem putting Dr. X on a
contract for the 5-day stint of seminars.  The fact that Alabama later hired
him as an employee shouldn't affect that, as long as the nature of his
full-time work (they didn't say what it was) is different, and other people
doing that same kind of work are treated as employees.

When we run into this situation here, I ask the department to document the
type of work the person has done as our employee, vs. the type of work
they've done as a contractor.  The more different, the better.  A biology
professor who contracts with us to tune pianos is a slam-dunk, and would
have no problems passing IRS muster.

-----Original Message-----
From: Valerie Seaquist [mailto:xxxxxx@EMAIL.UAH.EDU]
Sent: Friday: May 10, 2002 4:27 PM
To: xxxxxx@HRINET.ORG
Subject: [RESADM-L] Consultants (IRA 1099) vs Employees (IRS W-2)

Good Afternoon --

I hope you can shed some light (hope, encouragement) on this situation. Our
office is responsible for issuing subcontracts and consulting agreements
funded by contracts and grants and in March we issued a 5 day consulting
agreement (March 17- 21) to Dr. X to present several seminars. The agreement
was for a fee and actual travel expenses. Dr. X did the seminars and
submitted a voucher and receipts as required and we instructed the Principal
Investigator to issue a requisition for payment. All this is as we would
normally do.

In late April, Dr. X was hired by the University as a full-time employee.
Our Accounting Department is now holding the consultant agreement payment
requisition for the fee portion of the payment saying that Dr. X is an
employee so must be paid through the Payroll system. We explained that the
consultant work preceded his employment and they said it didn't matter
because IRS would be very upset if we issued a 1099 and a W-2 form to the
same person in the same year. [Two different payment situations. Seems to me
that this would warrant two different tax forms.] They now tell us that we
must submit a payroll form for his March effort, despite the fact that he
wasn't an employee. It seems to me that we are not being entirely
straightforward with our payroll records if we do this.

Is there some IRS ruling, regulation, whatever that would require that we
treat non-employees as employees even if we have agreements with them
specifically stating that we do not have an employer-employee relationship?

As always, thank you for your wisdom & experience . . .

Val Seaquist
The University of Alabama in Huntsville

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