An employee recently warned me that receiving a W-2 and 1099 from my business in the same year would be a big IRS red flag. Is this the case?

ANSWER

The BIDaWIZ Team's Answer:

Technically, it is possible for a worker to receive both a W-2 and 1099-MISC form for the same tax year. Although, this is generally a red flag for the IRS as it's typically not justified. This arrangement would make sense if the independent contractor had their own business and then transitioned into a full-time employee during the year. However, the fact pattern suggests that the worker was doing full-time W-2 employee work while she was also doing "independent contractor" work. Our recommendation: Did you already issue a 1099 or is this for the 2013 tax year? If you haven't done so, you should report her entire earnings on the W-2 Form and make sure you withhold the correct amount of taxes. If you already issued a 1099 and W-2 and this relates to the 2012 tax year, you should issue corrected 1099 and corrected W-2 forms to account for the change. She will of course have to file an amended 2012 tax return, if it relates to the 2012 tax year.