Can a 1099 payment be classified as W-2?

[Jakyasar]

A client paid their children 1099 i/o w-2 at the suggestion of their CPA, this is for 2025. The children received W-2 for 2024 and at least one them were eligible to participate in the pension plans.

I am told to accept 1099 as w-2 (which is the compensation definition in the plan document).

How can I accept this, makes no sense?

Here is the definition from basic plan document. Checked all the code etc and no reference to any 1099 equivalency.

"W-2 Compensation" means wages, within the meaning of Code section 3401(a), and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code sections 6041(d), 6051(a)(3), and 6052. W-2 Compensation shall be determined without regard to any rules under Code section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2))."

Anything I am missing?

[Peter Gulia]

I doubt you’re missing the essence.

Assuming the employer or service recipient and the retirement plan’s administrator are, in essence, one person (whether a business organization or a human), and assuming the worker’s parent controls the business:

Was the worker old enough that she could have made a nonvoidable contract? (Under most States’ laws, 18.)

Even if old enough, is it believable that the worker was not subject to the service recipient’s control for the work done?

Was the work done of a kind that would be done by nonemployees for a business of the kind the service recipient does?

If the plan’s administrator interprets the plan’s governing document to treat a worker tax-reported as a nonemployee as an employee and to treat her nonemployee compensation as an employee’s wages, what is the administrator’s reasoning for that interpretation?

Has anyone advised the employer/administrator about tax law’s duties of consistency?

If your client tells you it has considered carefully and accepts all risks involved, how confident are you that you would not be seen to be involved in a breach or violation?

Might it be effective to suggest to the certified public accountant—quietly, out of the view and hearing of your client—that the CPA reconsider one’s advice? And consider whether a Form 1099-MISC report was mistaken and should be undone and corrected with a Form W-2 report?

This is not advice to anyone.

[Paul I]

@Jakyasar exactly which flavor of 1099 was issued to the children? MISC? NEC? or any of the other 20 flavors?

[Jakyasar]

Unfortunately was not provided any info about the flavor. Client is being difficult to provide the information. Waiting to hear from the CPA, if ever.

All I got was, they were compensated as 1099 since they are in college.

[Paul I]

This sounds like a situation where the college child has a campus or similar job associated with the college and receives a 1099-MISC.  If this is the case, then the income is not received from the plan sponsor and is not plan compensation.  There are other possible scenarios, almost all of which point to this is not plan compensation.

I suggest that you ask for a copy of the 1099 and look at who is listed as the payor.  If the payor is the plan sponsor and the form is a MISC, then there is at least an argument that this could be plan compensation.  Regardless of who is the payor, if the form is an NEC (Non Employee Compensation), then by definition the college child was not an employee of the plan sponsor and it is not plan compensation.

If the client is insisting that you must recognize the 1099 compensation as plan compensation, then you have to wrestle with where the boundary is for your professional ethics and your willingness to continue to serve the client.  Some may accept a client's written instruction to use the 1099 compensation, some may accept documenting receipt of some other verifiable documentation, and some may only accept having a copy of the 1099 that was sent to the college child (which should be part of their personal tax return documentation.)

Keep in mind that if you are the one making the decision absent formal documentation, this can be construed as a fiduciary act.

[david rigby]

I'm unsure why you care.  It appears the original questioner is recording census data for a DB and/or DC plan.  But, after you have provided your annual reminder of the plan definition, isn't it the job of the PA to provide the census data, not your job to audit it? 

It appears the PA has done more than that, by telling you about a 1099. 

• Your proper response is (might be) to say, "That's not what the plan says.  So, if you want me to include this, I will assume, unless you tell me otherwise, that you are correcting the 1099 and issuing a W-2, but that is your task to do, not mine.  I don't need to see any of the form(s), but if you later tell me it was not done, then I will use that information to exclude this compensation per section X.x of the plan document." 
• OR, you could say the opposite, "Per x.x of the plan document, this is excluded.  When you tell me it has been corrected, I will include it."

IOW, you have done your consulting duty to remind the PA about the possible error/inconsistency, and that only the PA can fix it.  If you have a relationship with the plan sponsor's accountant and/or ERISA counsel and/or payroll vendor, you might casually mention this, hoping a comment from that other person will also carry some weight to get it fixed, whatever that fix is.

[Jakyasar]

1 hour ago, Paul I said:

This sounds like a situation where the college child has a campus or similar job associated with the college and receives a 1099-MISC.  If this is the case, then the income is not received from the plan sponsor and is not plan compensation.  There are other possible scenarios, almost all of which point to this is not plan compensation.

I suggest that you ask for a copy of the 1099 and look at who is listed as the payor.  If the payor is the plan sponsor and the form is a MISC, then there is at least an argument that this could be plan compensation.  Regardless of who is the payor, if the form is an NEC (Non Employee Compensation), then by definition the college child was not an employee of the plan sponsor and it is not plan compensation.

If the client is insisting that you must recognize the 1099 compensation as plan compensation, then you have to wrestle with where the boundary is for your professional ethics and your willingness to continue to serve the client.  Some may accept a client's written instruction to use the 1099 compensation, some may accept documenting receipt of some other verifiable documentation, and some may only accept having a copy of the 1099 that was sent to the college child (which should be part of their personal tax return documentation.)

Keep in mind that if you are the one making the decision absent formal documentation, this can be construed as a fiduciary act.

I am definitely not making a decision and may even walk away

[Jakyasar]

36 minutes ago, david rigby said:

I'm unsure why you care.  It appears the original questioner is recording census data for a DB and/or DC plan.  But, after you have provided your annual reminder of the plan definition, isn't it the job of the PA to provide the census data, not your job to audit it? 

It appears the PA has done more than that, by telling you about a 1099. 

• Your proper response is (might be) to say, "That's not what the plan says.  So, if you want me to include this, I will assume, unless you tell me otherwise, that you are correcting the 1099 and issuing a W-2, but that is your task to do, not mine.  I don't need to see any of the form(s), but if you later tell me it was not done, then I will use that information to exclude this compensation per section X.x of the plan document." 
• OR, you could say the opposite, "Per x.x of the plan document, this is excluded.  When you tell me it has been corrected, I will include it."

IOW, you have done your consulting duty to remind the PA about the possible error/inconsistency, and that only the PA can fix it.  If you have a relationship with the plan sponsor's accountant and/or ERISA counsel and/or payroll vendor, you might casually mention this, hoping a comment from that other person will also carry some weight to get it fixed, whatever that fix is.

Of course I care on the quality of the data I get and question every aspect of it. I agree not to play data police but up to a certain point. At the end of the day, any hiccup will be something I would be dealing with, whether I like it or not. I am not making the client's error/mistake my problem especially after I check and question it. Once I get the CPA involved, I will see what and if I will move forward.

I have mentioned the plan document provisions and that needs to be done for compensation recognition.

[ESOP Guy]

Just to be clear who is a W-2 employee verses a 1099 contractor isn't something that you just decide and I mean by anyone.  There are objective tests to determine if a person is an employee or not.  Not that is the TPA's problem but this we just decided means they are most likely ignoring the law. 

[Jakyasar]

17 minutes ago, ESOP Guy said:

Just to be clear who is a W-2 employee verses a 1099 contractor isn't something that you just decide and I mean by anyone.  There are objective tests to determine if a person is an employee or not.  Not that is the TPA's problem but this we just decided means they are most likely ignoring the law. 

Absolutely correct

[fmsinc]

Does this help?

https://www.federalregister.gov/documents/2026/02/27/2026-03962/employee-or-independent-contractor-status-under-the-fair-labor-standards-act-family-and-medical?utm_campaign=subscription+mailing+list&utm_medium=email&utm_source=federalregister.gov

 

[David D]

Agree with @ESOP Guy .  Very common we see a child or spouse paid W-2 wages from a small employer while doing zero of what an employee might do, just as we see them pay an individual, that does everything an employee would do, but they classify as a 1099 contractor.  As a TPA, we don't make those decisions for the employer.

[Jakyasar]

Thank you all for your input, this was a great dsicussion.

[austin3515]

if they had 1099 income they should be able to do a Roth IRA.  So maybe everyone gets what they want? 

We know clients are usually wrong when they code people as 1099-MISC employees but its not our problem.  I'll bet all of our service agreements specify it's not our responsibility to make that determination.

[ConnieStorer]

Adding another wrinkle to this discussion.

What do you think of a situation when the employee receives both a W-2 and a 1099-MISC.  Bonuses and Commissions are paid by the 1099 with regular wages being paid by a W-2.  This includes ALL employees.  The accountant said this was fine and they have been through several IRS audits with no issues.

My biggest concern is that by excluding the 1099 wages we are discriminating against the NHCE's if the HCE's have regular wages in excess of the compensation limit.

[Jakyasar]

22 minutes ago, ConnieStorer said:

Adding another wrinkle to this discussion.

What do you think of a situation when the employee receives both a W-2 and a 1099-MISC.  Bonuses and Commissions are paid by the 1099 with regular wages being paid by a W-2.  This includes ALL employees.  The accountant said this was fine and they have been through several IRS audits with no issues.

My biggest concern is that by excluding the 1099 wages we are discriminating against the NHCE's if the HCE's have regular wages in excess of the compensation limit.

I have seen this and IRS was not happy upon an audit. As you stated, it could be BRF issues as well as 414(s) issues.

[austin3515]

You’re circumventing payroll taxes is the bigger issue than retirement plans (both are big but the IRS wants its money. Employers are less of a credit risk than individuals 

[Peter Gulia]

Now that we’ve responded to Jakyasar’s question: “Anything I am missing?”, let’s consider some conduct questions.

Recall that the difficulty results from someone else’s, not Jakyasar’s, advice.

Imagine a TPA tells her client (perhaps after politely telling her client’s accountant) about the issue-spotting we’ve described.

Despite those conversations, imagine the client (and assume it is the retirement plan’s administrator) in writing instructs the TPA to treat the worker as an employee and to count the amount tax-reported on Form 1099-MISC or 1099-NEC as the worker’s compensation to be counted in the retirement plan’s definitions of compensation. And to perform the TPA’s services using those instructions.

BenefitsLink neighbors, what do you think:

Is it permissible to perform the TPA’s services as instructed?

About whether to resign the engagement, is that a must, should, or need-not?

What’s your reasoning for your outlook?

Is your view affected or influenced by a professional-conduct rule?

Is what to do based on a personal business choice?

[AlbanyConsultant]

I would hold to see the W-2.  I figure that since I already have evidence that it was NOT on W-2, I can't take it unless I now see that something has changed.

I wouldn't immediately resign; I'd complete the work based on what I could support.  If they want to fire me over that, so be it.  If they ignore my calculations and do something different, then I'd probably have to resign.

I'm pretty sure that I would apply this consistently regardless of the client... but you know what they say about good plans surviving first contact.

[Paul I]

Here is a slide from an IRS webinar about Circular 230.  

When situations like this come up, we see it as an opportunity to educate the client on the issues and potential consequences of their actions.  In the vast majority of these situations, the client (admittedly often grudgingly) does the right thing.  If we know that the client will disregard our input and proceed with making a bad decision, we will resign.  This has happened very rarely.  Getting fired by the client has happened rarely.  Becoming a trusted service provider has been the most common outcome.

[Peter Gulia]

Another point for my curiosity:

If you knew for certain that the Regulations Governing Practice before the Internal Revenue Service do not apply to you—ever, or for the situation in which you’re evaluating your professional or business conduct, would that change your thinking?

First, a worker who is not an attorney-at-law, certified public accountant, enrolled agent, enrolled actuary, or enrolled retirement plan agent has no right to practice before the Internal Revenue Service.

Next, a worker who has a practice right might choose not to use it. (Some employee-benefits lawyers, and even tax lawyers, have rarely or never submitted a Form 2848 or otherwise appeared before the IRS.)

Further, the Treasury department recognizes (after an appeals court’s unchallenged decisions) that Treasury’s power to impose conduct rules extends only to a representative, and only to the extent of the representation in a matter before the IRS.

That recognition shows in the Treasury’s proposed § 10.34:

§ 10.34   Standards with respect to tax returns, and documents, affidavits, and other papers prepared or submitted while representing a client before the Internal Revenue Service.

(a)    Tax returns prepared or submitted while representing a client in a matter before the IRS.

(1)    A practitioner may not willfully, recklessly, or through gross incompetence—

(i)    Sign Prepare, while representing a client in a matter before the Internal Revenue Service or, for tax returns prepared by the practitioner prior to the representation, including returns already filed with the Internal Revenue Service, submit a tax return or claim for refund or a claim for a credit that the practitioner knows or reasonably should know contains a position that—

. . . .

(d)    Relying on information furnished by clients. A practitioner advising a client to take a position on a tax return, document, affidavit{,} or other paper submitted to in a matter before the Internal Revenue Service, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, hHowever, the practitioner may not ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.

Regulations Governing Practice Before the Internal Revenue Service [notice of proposed rulemaking], 89 Fed. Reg. 104915 (Dec. 26, 2024), https://www.govinfo.gov/content/pkg/FR-2024-12-26/pdf/2024-29371.pdf. See also https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202504&RIN=1545-BQ12.

Even if the Treasury has some power to regulate written tax advice unconnected to a representation before the IRS, in the hypo described above a bad position does not result from the TPA’s tax advice.

If you knew for certain that the Circular 230 rules do not apply to you, would you nonetheless follow those rules as a way to guide your conduct?

(I ask about this for my university and other teaching on professional conduct. I’ll use any information I learn here only in an aggregate or anonymously.)

[Paul I]

Condensing @Peter Gulia 's (not so) hypothetical scenario question, if I know something is wrong and I know I cannot be held accountable, would I still do it? It is a question about character.  My answer is I would not do it.  The answer was the same when I was an employee and since I have been a business owner.

I will observe that in our business there are many paths forward for resolving issues, and keeping a focus on clarifying the facts and identifying solutions has proved many times over to be key.

[Peter Gulia]

More outlooks and viewpoints?

[david rigby]

Under @Peter Gulia's (not so) hypothetical situation, I would do as instructed by the plan's PA: process as if the reported compensation meets the required plan definition.  Why?  Because I have already done my consulting duty to point out the potential problem with the 1099, which means I know (not suspect) that the potential problem has been identified and communicated to the proper person.

It's not my job to police a correction.  Note my use of the word "potential".  It's not my job to know or determine if the original information (ie, the 1099) was a mistake.  IOW, I would be making a consulting mistake if I assume the first information is correct; perhaps it was not.  I'm not faulting @Paul I's response above, but my read of his comment is that he is assuming the first census data is "more correct" than later data, which I will not do.

That said, I would alert my E&O insurance carrier and my own legal counsel.

And, in case you are wondering, I am an Enrolled Actuary so I have a right to practice before the IRS, or at least I could before my retirement and change to inactive status.

[Paul I]

How each of us decides to approach this situation is a personal decision likely very much influenced by the policies of our employer.  My personal approach is to attempt to get the facts. I agree that assumptions too often are inaccurate.  If the facts reveal that the client, after being made aware of the issues, is doing something demonstrably wrong, then I have no problem with terminating the engagement.  The client is free to move forward on their own or to engage another service provider.  This is all included in our service agreement.  It works for us.

 

[Jakyasar]

Why would we want to bend over for a client when we know that something is wrong even if we will not be accountable? Let them walk away.

Ethics, professionalism as well as E&O comes to mind (you know very well the client will come after you no matter what), not worth it.