I appreciate you reaching out for guidance on this complex accounting scenario, @2robertc. Transitioning Dr. A's status from a W-2 employee to a 1099 partner indeed adds a layer of complexity, especially around the fiscal year-end. Let's walk through your situation to ensure everything is handled accurately.
The accrual accounting method you're using recognizes expenses and revenues at the time they're earned or incurred, regardless of when the cash transactions occur. Managing the transition between W-2 employee status and 1099 contractor status must be handled carefully to ensure compliance with tax regulations.
Since the $10K was earned while Dr. A was still classified as a W-2 employee, it properly falls under the W-2 class for 2024. You should process this payment (issue a paycheck) on 12/31/24, which will ensure it's reported on the 2024 W-2 form. Accruing this expense in 2024 is correct under the accrual accounting system, and the corresponding payment should reflect withholding taxes and other necessary deductions consistent with W-2 employment.
Starting 1/1/25, as Dr. A transitions to a 1099 contractor, any compensation from this date should be processed without tax withholdings as it corresponds to the new 1099 status. Payments for services rendered in 2025 should be tracked in a separate class (such as "DrA-PNR") and issued without typical payroll tax deductions.
Since the W-2 payment for $10K is processed at the end of 2024, a W-2 should indeed be issued in January 2025 reflecting this payment. For any subsequent payments made to Dr. A during 2025 under the contractor status, a Form 1099-MISC should be issued in January 2026, provided that Dr. A's earnings meet the threshold for 1099 reporting.
Given the potential complexities and implications across different tax forms, consulting with a tax advisor or the IRS directly about this dual-status issue is highly advisable. They can confirm that all aspects of this transition are handled in compliance with tax regulations and provide any additional guidance needed.
Handling the dual status of an employee and contractor requires careful consideration of both pay dates and tax reporting requirements. By ensuring proper classification and using the correct forms for each type of payment, you can maintain compliance and accurate records.
Additionally, you can check out this article to learn how to access your payroll tax payments and forms: View your previously filed tax forms and payments.
Thank you for being diligent about understanding and implementing these changes. Please don’t hesitate to reach out if you need further clarification or assistance. Good luck with this fiscal year transition.
