For Testing & Determining HCE - Does Comp Definition include W-2 and 1099 or just W-2?

[AContreras]

For 2013 an employee received W-2 for $105K and a 1099 for $25K. Is he a HCE for 2014 testing purposes?

Thank you.

[rcline46]

Did he receive the 1099 from the SAME employer? And why a 1099?

The answers will affect what is included in 'income' for the person.

[AContreras]

Received Both W-2 and 1099 from same employer. Employee was acting as a third-party broker to facilitate a project that was not in his normal scope of work -- thus employer issued 1099.

Thank you

[rcline46]

Others may disagree, but I would treat this as self-employment income and NOT add it back to his W-2 income. Of course he will have problems with the Schedule C, but so what?

[hr for me]

I'd be very concerned about an audit and the IRS considering the 1099 income W-2 wages personally. I know this is not the question you asked. But unless he also brokers other projects outside of work for other clients, I would not have made that call. In the IRS' eyes a person is usually either an employee OR an IC but not both at the same time. They could start as one and change to the other mid-year so that is one out they might have if he wasn't doing both at the same time. I hope they got legal advice on this prior to making the decision and there are some facts not in evidence.

your answer on HCE is going to depend on the definition of plan compensation, especially if it is "gross income". I am assuming deferrals did NOT come out of the 1099 income.

I think their problem is larger than whether he is an HCE in this plan or not. You might have to solve that one first especially if he was participating as an employee while earning IC income.

[austin3515]

1099 income is not eligible because only non-employees are getting 1099's and you'll disqualify your plan in a New York minute if the plan is not for the exclusive benefit of employees.

I cannot imagine a scenario that justifies giving an employee a 1099 for a special project under any circumstances. If you pay your employee for any services rendered, the rules are clear, they get a W-2. That's true even for Board Members who are traditionally paid via 1099. If they are employees, any comp for being on he board is w-2.

[Belgarath]

Oh, I can definitely see (and have seen) situations where an employee also is legitimately paid on a 1099 as an independent contractor.

One real example that comes to mind - employee worked at a lumberyard as an employee building roof trusses by day, but also had an auto repair business on the side repairing trucks. The lumberyard would sometimes have him repair trucks, as his rates were somewhat cheaper than many local garages, and they trusted the quality of his work.

However, Austin's point is well taken - this is an area where there is a lot of abuse, and is subject to a lot of scrutiny. Depending upon the facts and circumstances of the "special project" it could be legitimate, or it could be crapola.

Personally, I would just question the employer to make sure it is legitimate 1099, and then I've done my due diligence. If it turns out it was incorrectly classified, it is the employer's problem (and they can pay me to fix it.)

[hr for me]

The auto mechanic example does work because he had an auto repair business on the side. He had other customers and a true business. So yes, I agree with Belgarath it can work.

Another question to ask (that will be asked at WC audit time) is does this work done by this employee paid by 1099 have their own Workers Compensation coverage? Unless they are in TX where the employer can still opt out, it is my understanding that he would have needed it and the main employer's WC auditor is going to want to see proof of insurance for that 11099 business. If not, the main employer is going to get charged premiums for that 1099 income. Just another small piece of the whole employee vs IC equation. I've done a whole lot of research over time (and a lot of WC audits) due to our businesses and tend to be very vigilant on what is and is not a legitimate situation. Hopefully for the OP this one is.

{benefits is just a small part of my full HR role that includes these types of issues. Oftentimes a decision is made from a benefits and/or taxation point of view without looking at the full scope of HR decisions}

[Gadgetfreak]

I don't know the answer to the original question but what about an example where someone is hired as a consultant in January and paid via 1099. The project concludes in Feb and it was a "job well done". The company decides to offer this consultant a salaried position as soon as the consulting project is over. Is that a possible scenario?

[austin3515]

That would probably be used as evidence that you misclassified the "consultant" in the first place. The auto mechanic is actually a terrific example of what the IRS wants to see for a 1099 contractor. It's really for that situation exactly, and nothing else. If someone is working for you and only you, on a project that you designed the strategy, to be completed in the time-frame you dictated, and in the manner you dictate, if they are working in your office, with your supplies, with support from your staff, they are probably your employee. "He was only working for me on a special project" is not the criteria. No matter how many times I hear it, it is not the criteria.

[hr for me]

Agree with Austin. Many are misclassified as ICs just because the employer confuses short term employment with IC.

One of the main criteria is whether that person could also do consulting on other projects for other employers (even a competitor) at the same time. Another is that person doing a job that normally would be done by an employee and do you have any other employees doing that specific job? If you created the job for that consultant and it didn't exist before and you had no former employee in the position, it is less gray.

While TX is just one state, I have found that their online explanation is one of the best. If you search TWC Independent Contractor test (for some reason I can't paste the direct link), it goes into much more detail about the questions posed by the IRS' three pronged approach (financial, behavioral and type of relationship)

It is not a simple yes/no question about who pays the FICA taxes and whether the person is eligible for benefits unfortunately. Again, hopefully the OP's client got good advice before they set up the relationship.