Tax Perspective: Employees Going From W-2 to 1099

If you have an employee going from W-2 to 1099 in your company, AMS is here to help. We will provide a couple examples of when this transition, an employee going from W-2 to 1099, would be appropriate. Of course, we will also let you know how AMS can support you in that transition.



When You Should Transition an Employee to an Independent Contractor

This is a fairly unique tax situation. Only a few instances warrant changing a worker’s status from employee to independent contractor. Your company might be ready to make one of these transitions, which could impact your workers’ employment status.


S Corporation Designation

You might be considering transitioning your business to an S corporation, often dubbed “S Corp,” or S subchapter. An S Corp is often associated with small businesses who have 100 shareholders or less. The S Corp tax status is its distinction from other corporations because it does not pay taxes. You, as the owner, and other shareholders would report company revenue as personal income.

A transition into an S Corp could mean changing workers to independent contractors. In this case, you might fire an employee, and then rehire the same person as an independent contractor.


Company Downsizing

Downsizing is another reason that an employee going from W-2 to 1099 could make sense for your company. It is easier to end a contract with an independent contractor than to fire an employee. If you have workers transition from employees to independent contractors earlier on, it could save you money when the time comes to downsize.

On that note, employees going from W-2 to 1099 can provide financial benefits. Independent contractors cost less on a payroll than employees.


Important Notes

There are a few things to consider before you decide to transition a worker from employee to independent contractor

  • Improperly classifying a worker as employee or independent contractor can have legal and financial ramifications for your company. The IRS provides information about how to make the proper classification and tax arrangements. Make sure to review this information before transitioning an employee. Going from W-2 to 1099 requires a bit of legwork, but it could have financial benefits for your company.
  • It makes the most sense to make this transition at the end of a tax year, so the worker can finish the year with a W-2 and begin the new year with a 1099. If that’s not possible
  • More often than not, you will transition an independent contractor into an employee position. The information provided in this article is helpful if you have to transition an employee to an independent contractor, but as noted above, only a few situations warrant that transition.


How AMS Can Support Your Tax Transition

If you are making a company change that might cause employees to be classified as independent contractors, or vice versa, AMS has software for you. The AMS 1099 Forms Filer caters to your company’s needs. The Forms Filer is a responsive tax software that can handle any type of employee or independent contractor your company might hire. AMS will support you through the transitions that will take your company where you want it to be.

Software Solutions from AMS

Our W-2 and 1099 Forms Filer is our only required platform. From there, users pick the services they need. Choose from the tools below to build out your customized accounting software.