Thursday, March 20, 2014

How to Switch from 1099 to W-2

When it comes to classifying the relationship between an employee and employer, it’s generally handled one of two ways: either through a 1099 or a W-2. Sometimes it becomes necessary to convert a 1099 to a W-2. If you find yourself in this situation, you might be confused as to how to do this. Continue reading for some simple steps.

Reasons for Converting

According to CEO Issa Asad There are a number of reasons an employee may need to be reclassified. Usually, it’s when a business hires an employee as a contractor. Later on, if that employee gets hired on as a salaried worker, they’ll need a W-2. It’s essential that this gets done timely, as failure to do so could incur sizable penalties.

Review IRS Guidelines

First, you’ll want to go over the guidelines for classifying an employee as a salaried worker as outlined by the Internal Revenue Service. Then make a list of all the employees this will affect at the end of the tax year.

Notify the Employee

Next, you’ll want to notify the employee this affects of the change. Be sure you do this in writing and ask the employee for the necessary information you’ll need from them in order to complete this change. Then make note of the date and formally submit the records to their employee file.

Produce a New File

Now you’ll need to create a new employee file in the company’s employee record system and/or database. Classify them as either salary exempt, salaried or hourly non-exempt, depending on how you’ll be compensating them going forward. You’ll want to review the Fair Labor Standards Act to be certain you’re handling this correctly.

Setting Up a New Pay Schedule

Given their new payment designation, you’ll want to create a payment schedule for them that matches. Create the necessary payment triggers for things like overtime should they work beyond 40 hours a week (if the employee is hourly).

The W-4

The employee will now need to fill out a W-4 form which will include their individual information as well as any tax exemptions they’re entitled to. This will be necessary when you calculate payroll taxes. Put them into your employee database as well as whatever timekeeping system you use.

Generating the W-2

You’re now able to create a W-2 for this employee. Be sure you do so before January 31st. This way it will encompass all the wages and taxes withheld for the prior tax year. When it’s complete, provide the employee with 4 separate copies. This will cover any tax filing requirements they may have. 

Make sure you also keep a copy of the W-2 for your company’s own records as well. Then send 6th copy to the Internal Revenue Service and the state authorities as well, if necessary.
With all these steps completed, you’ve now successfully converted your contractor and created the requisite tax information. While none of this is especially difficult, it can be time consuming. So be sure you begin the process as soon as possible and keep it moving steadily.