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Answers are provided by S. Derrin Watson, JD, APM
W-2, 1099, or Both?
(Posted August 15, 2002)
Question 225: I worked as a commissioned sales person. Commissions from company A were reported using a Form W-2, but commissions from all the other companies were reported on Form 1099. The owner of company A held 100% ownership in all of the companies and directed each company. All companies were in the same office space. Shouldn't all commissions have been subject to reporting on a Form W-2? I think the way it was handled will limit my retirement contributions.
Answer: Consistency may be the hobgoblin of little minds, but it is the sine qua non of dealing with the IRS on employee issues. (Hmmm. What does that say about the IRS? Oops, I didn't say that.)
I think it would be quite reasonable for an IRS auditor reviewing the situation to ask why a business owner treats an employee one way at one company and treats him differently at another company. There might be good answers to that question. It could be that you are subject to less supervision at the 1099 companies, or that you have higher unreimbursed business expenses, or you have a greater opportunity for a profit. But there better be a decent explanation, because the way it's been split seems to cry out for someone to ask the question.
You can force the issue. To do so, you would file a Form SS-8 with the IRS. Using that form you would explain the situation and lay out the reasons why you think you are an employee. In so doing, you are essentially asking the IRS to audit your employer, who might be less than thrilled with your diligence. Also, employers pay more to Form 1099 workers ("independent contractors") to make up for a lack of benefits and payroll taxes, so changing your status might change your bottom line pay. That's why it makes sense to talk with the owner first.
You are right that contributions to the company's retirement plans are based on your Form W-2 income from all of the companies. Of course, if you really are an independent contractor for your Form 1099 income, you can set up your own plan as a self-employed person if you wish to shelter some of that income.
For more on determining whether you are an employee or an independent contractor, see chapter 2 of my book, Who's the Employer.
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