Wants to Split W-2 Incom to get a part as 1099

[katieinny]

A sole shareholder S-Corp guy isn't working on his own anymore. He got hired by a company, so he can't make any contributions to the profit sharing plan he had under the S-Corp. However, he's thinking of asking the company he works for to reduce his salary and give him a 1099 for some of the work he does for them. Then he wants to make deferrals into his employer's 401(k) plan and employer contributions to his own PS plan.

It's a small company, and he thinks they will readily agree. However, I'm thinking either you're an employee or you're not -- you can't get a W-2 and a 1099 from the same company year after year. Maybe in a transition year, but not on an on-going basis. He thinks his duties can be easily divided into employee type work and independent contractor type work. Am I being too cautious?

Then he wants to hire a NHCE (can't be a family member due to attribution), and include him or her in his PS plan to keep it protected from creditors. Seems like a lot of jumping through hoops to me, but maybe I'm just getting lazy in my old age. What do you all think?

[Mike Preston]

It is not uncommon for a single individual to get both a 1099 and a W-2 from the same company, year after year. If the company's counsel says it works, I'd not be inclined to fight it.

But, it is legitimate only if it is .... and this will sound silly.... legitimate. And if it is not, the employer's 401(k) plan is probably at risk. Hence, the onus is on the employer to "get this right."

In other words, I can't see why an employer would go along with this unless it was.... you knew this was coming, right?..... legitimate.

[katieinny]

Mike: Thanks for your reply. Sounds -- I guess the right word would be -- legitimate -- to me. Of course, I'm wondering if a small employer will take the time, effort and expense to check with their legal counsel before they agree to the arrangement, but that's not my problem.

[Mike Preston]

Mike: Thanks for your reply. Sounds -- I guess the right word would be -- legitimate -- to me. Of course, I'm wondering if a small employer will take the time, effort and expense to check with their legal counsel before they agree to the arrangement, but that's not my problem.

One way to avoid it ever being your problem is to strongly recommend, in writing, that they have it reviewed by counsel and, at the same time, lay out the dire consequences for them if the get it wrong.

[katieinny]

I would agree, except that the employer isn't approaching us. It's the employee who was speculating about how he could keep his own PS plan going and came up with this idea that he's going to take back to his employer. The best we could do is write a letter to the employee about the risks his employer would be taking if he allowed such an arrangement.