A terminated employee has become a consultant for X company. I will process her invoices as 1099 applicable. However, the payroll manager is claiming the state does not allow both a W-2 and a 1099 to the same person. Is it incorrect to issue a 1099?

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An individual who has changed status from employee to contractor would require a 1099 (and you need a W-9 from them) provided that they truly qualify as a contractor rather than an employee. Assuming they worked in both capacities within a single year, you would issue both a W-2 and 1099. You are probably aware that the government is vigilant against companies that move workers to contract status from employee status in order to avoid provision of benefits—therefore you must have strong evidence to demonstrate the validity of the change in status. Refer to TAPN's Form 1099-Misc Filing Basics: Independent contractor or employee for more detailed information.

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