Expert: Shirley McAllister, CPP, PHR - 7/17/2008

Question
QUESTION: Our company pays a sign on bonus to new employees. They typically receive the bonus about 6 months before they actually start working. Since they are not in the payroll system yet, we have been paying them out of accounts payable and issuing 1099s. Are there any ramifications if we continue to do so, or should be start paying them out of payroll?

ANSWER: Patrick,

They are not paid as employees until six months after they are hired by your company.  That is rather far out to give a bonus.  Technically they are employees when they are hired but they don't start working for six months.

The only thing I can see is that they are going to receive both a 1099 and a W-2 form in the same year from the same company. That is usually not a good thing.

If the government receives both a 1099 and a W-2 for the same person from the same company it throws up a red flag for an audit. If you are audited you will have to explain to the government auditor why you did not consider them employees when the bonus was paid, but paid the bonus as a hire on bonus for a new employee. They will want to know why taxes where not withheld and it was not reported on the W-2.

If you are confident answering those questions for an IRS auditor and feel good about your explanation to him than you are okay.

If you do not feel good about defending your reasoning to an IRS auditor you may want to take a look at how it is being handled.

Sometimes it takes a while, but if you consistently give both a 1099 and a W-2 to the employee in the same year at some point in time you will probably be audited.

Shirley



---------- FOLLOW-UP ----------

QUESTION: The 6 months delay is due to the fact that there is a certain waiting period on certifications.  The bonus is usually paid in late July/August and the employee doesn't start until the next year.  Would that make a difference?

And I assume that moving expenses are ok to come out of accounts payable as long as there are receipts?

Answer
Moving expenses are fine to come out of Accounts Payable with receipts. If the company actually pays the third party involved in moving expenses it is even better.

If the person only gets the sign on bonus and no other income in the year I think you will be okay as they will only get a 1099 for the year. When it gets questionable (I didn't say wrong) but questionable is when the employee gets both a 1099 and a W-2 in the same year.

Shirley