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Answers are provided by S. Derrin Watson
1099 for Bonus Only
(Posted May 4, 2004)
Question 263: My company currently has no retirement plan. Is it possible to have my performance-based bonus reported on a Form 1099 even though my normal salary is reported on Form W-2?
Answer: Is it possible? Yes. Would it be correct? Absolutely not. In responding to your question, I will refer to my book, Who's the Employer?. (Subscribers can click to view online the text of references to sections in the book.)
You either are an employee of the company or an independent contractor. Though it's theoretically possible to be simultaneously an employee and an independent contractor, it would be extremely rare and generally would involve doing 2 totally different jobs for the same employer. That's not the case here. The performance bonus is part of your compensation, presumably for services you performed as an employee. It is treated the same as all other compensation you receive for those services. (See WTE 2:36.)
The first sentence of your question concerns me. It implies that the reason you wish to be "1099-ed" for the bonus is so that you can set up a retirement plan to shelter part of it. That would work if you really were an independent contractor. But if you aren't (and you're probably not), then you aren't considered "an employer" for purposes of the retirement plan rules; hence any retirement arrangement you set up, other than an IRA, would not receive any special tax benefits. What counts is not how your employer reports a payment (although that enters into the consideration to a very small extent WTE 2:25); what counts is what the payment truly is, as a matter of law. Don't go down this route.
Incidentally, SunGard Corbel's upcoming slate of half day seminars on Who's the Employer will cover questions like yours, because it is impossible to understand leased employee issues or to put controlled group issues in proper context, unless one first understands the fundamentals of the common law employer-employee relationship. The key point to remember about that relationship is that employee status is determined by all the facts, not by what the parties call it.
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