Episode 40: IRS Releases FAQs on Overtime, With One 1099 Item
The IRS recently released new FAQs dealing with the deduction for qualified overtime compensation. At first glance, this would seem to have nothing to do with 1099s. Overtime is generally an employee issue, which means W-2 reporting. But buried in the FAQs is an interesting question: When would qualified overtime compensation be reported on Form 1099-MISC or 1099-NEC instead of Form W-2? Yes, that can happen. The issue comes down to worker classification. The Department of Labor and the...
The IRS recently released new FAQs dealing with the deduction for qualified overtime compensation.
At first glance, this would seem to have nothing to do with 1099s. Overtime is generally an employee issue, which means W-2 reporting.
But buried in the FAQs is an interesting question: When would qualified overtime compensation be reported on Form 1099-MISC or 1099-NEC instead of Form W-2?
Yes, that can happen.
The issue comes down to worker classification. The Department of Labor and the IRS use different tests for determining whether a worker is an employee or an independent contractor. That means it is possible for someone to be treated as an employee for purposes of the Fair Labor Standards Act — and therefore entitled to overtime — while still being treated as an independent contractor for federal tax purposes.
Section 530 relief can add another wrinkle. A business may be permitted to continue treating certain workers as independent contractors for federal tax purposes even when their underlying classification might otherwise point toward employee status.
In this episode of Information Return Intelligence, we look at this unusual overlap between overtime rules and 1099 reporting, including:
- Why DOL and IRS worker-classification rules don't always produce the same answer
- When overtime could potentially appear on a 1099
- How Section 530 relief can complicate the analysis
- Why businesses should review contractor classifications rather than assuming "contractor" means the same thing for every federal law
It's another example of why worker classification — and 1099 reporting — isn't always as straightforward as it looks.
Information Return Intelligence is powered by IOFM.
Well can return intelligence, the fast moving weekly podcast where we talk about all things relating to 1099s, W9s, 1042S, and all sorts of things in the world of information reporting. My name is Jason Dinison. This week we're talking about the IRS releasing new frequently asked questions about the overtime deduction. And there's one 1099 note on that that we wanted to bring to your attention. We've talked about it before, actually, but we'll talk about it again today on information return intelligence powered by IOFM. So this episode is all about that one 1099 note in the new IRS frequently asked questions on overtime. But before we get into that, let's have our disclaimers. Don't make final decisions based on anything you see or hear today. Always pay appropriate counsel on your side before making final decisions. Remember that information return intelligence has great information for you, but it is not tax advice, and I am not your accountant, so always pay appropriate counsel before making final decisions. Let's get started with today's show. Last week the IRS released more frequently asked questions on the overtime deduction. Most of these items don't apply to 1099s. The overtime deduction almost always is going to be a W two thing, but there's one item that does apply to 1099s. And that can be found in question seven of the IRS's new FAQs. So here's what the question is. Under what circumstances is qualified overtime compensation reported on a 1099 miscellaneous or NEC instead of a Form W two? That's the question that the IRS answers. We'll get to the answer in just a second. If you've listened to other episodes, we've actually talked about this before. If you haven't listened to other episodes, we'll put some links in the show notes and you can go back and listen. So what is the answer? Well, the IRS had a three-paragraph answer, and what it gets at is that if you have a worker who under DOL tests is an employee, but who under IRS tests is a contractor, that's when you have 1099 reporting of overtime. And before we go into further explanation on that, let's hear a word from our sponsor, IOFM. The Institute of Finance and Management, IOFM, has certified over 25,000 financial operations professionals worldwide through its certification programs. These programs include accredited payable specialist or manager with U.S. and Canadian specific versions available, accredited receivable specialist or manager, certified professional controller, and side payment reporting specialist. That's the 1099 specialist certification that I teach. These are globally recognized AP and AR certifications that are well respected within the industry. These are available in English, simple Chinese, and Spanish. Learn more at IOFM.com. And now back to the show. Let's review worker classification quickly. When you have a worker, someone performing services for you, they are one of two things, and you only have two choices. They're either your employee or they are your contractor. There is no third option. And different government agencies have different views on who is an employee and who is a contractor. And the three main agencies that could look at this issue are the Department of Labor, the IRS, and States. And as it relates to this discussion about overtime and reporting it on a 1099, you're looking at Department of Labor and IRS as the two agencies. So you have the DOL, which uses a test called Economic Realities, and the IRS, which uses what's called the three-factor test, which really is a condensed version of the 20-factor common law test of control. They are different tests, and it is possible, I would say not likely, but it is possible that you could reach different conclusions under each test. So you could have somebody who is an employee in the eyes of the DOL, but a contractor in the eyes of the IRS. And that is when you would have the situation of needing to pay overtime to them under the Fair Labor Standards Act because they're an employee in the eyes of the DOL, but you would be reporting it on a 1099. And I think also watching Section 530 relief, Section 530 is something that is unique to IRS worker classification audits, where if you get audited, you can try to get what's called Section 530 relief, where the IRS will not reclassify contractors to employees, even if they probably are employees. The problem is that that relief only holds for federal tax purposes, like income and payroll taxes. It doesn't hold for other things. And so you might need to reclassify those workers to employees for other purposes. And that would be a more common situation. It would be less common, I think, to have just a worker whose dual status. They have a status of employee with the DOL and contractor with the IRS just because that's how the tests come out. I think it would be more common to have a Section 530 situation, though, where you've gone through a worker classification audit and you have contractors who probably should be employees, but you could keep treating them as contractors for tax purposes. And the actionable item here is to review your contractors and think about these DOL and IRS tests. And in particular, have you been audited on worker classification by the IRS and received Section 530 relief? This is something, and whether it's just the tests straight up to see if you've got these dual classification workers or you have this Section 530 piece coming into play. You've got to talk to whoever the, I always say whoever the appropriate party is on your side, your someone in-house who deals with worker classification, whoever that person is, needs to be involved in this discussion. That's a wrap on another episode of Information Return Intelligence powered by IOFM. Make sure to like and subscribe, share this with your colleagues, and find all of our episodes at dinasonmediaventures.com. I'm Jason Dinason, and we'll talk to you again next week. Dynason Media Ventures.