Ask the Tax Pro: Can I be Both a Contractor and an Employee?

Posted on 04. Feb, 2011 by Stefani in Ask the Tax Pro, Tax

Taxpayer says:

Hello and thank you for your helpful website! I have been unable to find an answer to this question and I hope you can help.

I live in California and work part-time for a small business that is a corporation. I will be moving to Texas and my current employer and I have agreed that I would begin working for myself as an accountant. I will get a business license and be working for the same company as a bookkeeper. I will set my own schedule and help with payroll taxes and basic accounting for the company.

My question is this: Will there be any difficulty in my being a W-2 employee and 1099 Independent Contractor in the same year? For my employer or myself?
Also what forms should I fill out to make sure everything is legal and kosher?

I have researched this subject on irs.gov and I will qualify as a Independent Contractor as far as I can tell. Being the one who dictates how, when and why I do things for the company and no longer an hourly employee answering the phones and setting appointments. Also I may expand in the future to other small business (in Texas most likely) that will allow me the same freedom to work online from home as an accountant or bookkeeper.

First, congratulations are in order. Making the move from employee to self-employed is quite an accomplishment.

It seems like you’ve obviously done your homework on the independent contractor classification. Nowadays, the IRS will tend to look at the level of control you have regarding the work being performed. There are 20 factors that the IRS will consider when determining who qualifies as an independent contractor—from things such as whether you set your own hours, perform the work on your clients’ premises, work for more than one person, etc. The full list with a bit of guidance can be found here.

It sounds like you should be fine, and there is absolutely nothing wrong with you going from an employee to an independent contractor in the same year. I know of a few instances where employees have gone from being employees, to freelancing on the side, to being full-time self employed—all in the same year. In a couple of those situations, their employer ends up being one of their clients.

As for the what you should do, definitely apply for an EIN, if you haven’t already done so—it’s fast, and you’ll have the number in minutes. It also wouldn’t hurt to have some kind of contract or written agreement, such as an engagement letter. Also, give them a signed copy of a W9.

Good luck and enjoy being an entrepreneur!

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

Stefani Whylie