Question 46: Our company has a SARSEP IRA program, which has been in force since 1990. Employees who have been with the company at least 3 years can choose to participate by electing to make salary deferrals out of their paychecks. At the end of the year our company is able to make an employer SEP IRA contribution (salary percentage based) to all elegible employees, even those who haven't made salary deferrals.

We now have a former employee who left in 1998. Since then, he has performed consulting work for us as a software developer, for which he has been issued a 1099. The work was done at his home. He also has a new full-time job. He claims he is still eligible for our yearly employer contribution based on last year's 1099 due to an IRS definition that says compensation can be "fees for professional services." Do IRS rules require a 1099-based SEP IRA contribution to a former employee who had no wages the previous year?
Answer: Either he's an employee for 1999 or not, with regard to his income. From what you are saying, it sounds like he probably is an independent contractor as a matter of law, but you can't just look at one or two facts to make such a determination.

There are many people who are classified as independent contractors who are, under the law, employees. What matters isn't whether they are given a Form 1099 or a Form W-2. What matters is the degree of control the employer has over the worker and over how the work is done.

If he is an employee, regardless of how he is being paid, then he is entitled to participate. If he is not (i.e., if he is an independent contractor), then the definition of compensation is irrelevant, and he is not entitled to participate.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.