Tax Question for Bonus Paid by Client

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agstudent
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7:16a, 1/15/26
AG
Last year, my wife worked for a company that basically farmed her out to various clients for project management services as a W-2 employee. One of the main clients she worked for got bought out and the new ownership offered her a full time position. However, they weren't set up to bring her on as an employee for several months, so they just kept the existing relationship with her previous employer. During that time, they sent her a bonus check directly. Now they are wanting to send her a 1099 even though she didn't actually work for them at the time in any capacity.

How should this be handled? Should the bonus have run through her previous employer and be reflected on her W-2?
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Kenneth_2003
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7:27a, 1/15/26
AG
This isn't an answer to the tax implications, but what is her W2 employer's policy on accepting bonuses paid by their clients?

Edit... Has she accepted the role with this "client" as a now full time W2 employee? I'm assuming yes since you mention "former employer" in your post. If she's no longer with that temp agency just take the 1099 and pay the tax on the bonus. The client likely paid it directly to her because they knew the temp agency was probably likely to take a cut or not authorize it at all. It's certainly taxable income.
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Sims
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8:17a, 1/15/26
AG
Should have gone through her w2 employer.

The 1099 is a misclassifcation/workaround by the client. I would push back if I was her and have the client reclassify the payment and the w2 employer add them to payroll.

If they push back on that, there's a form 8919 y'all can file to show that she shouldnt have been treated and paid as an independent contractor by the client. This will let y'all pay just the employee share of fica, you avoid self-employment tax and it puts the IRS on notice the client misclassified the payment. Then they get to deal with the IRS instead of you.
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TxAg20
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9:01a, 1/15/26
AG
ETA: She was a 1099 employee to the client, vis-a-vis an intermediary, at the time she was paid the bonus. Why would they be expected to bonus her via W-2?

I'm guessing she nets more of the bonus by paying the self employment tax on the 1099 than if the payor of the bonus had run it through the company that farmed her out.

I'm not an accountant, but a person who used to pay bonuses to both W-2 and 1099 employees. If someone complained to me about the tax consequences/treatment of their bonus, I would be reluctant to give them additional bonuses in the future.
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Sims
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In reply to TxAg20 • 9:17a, 1/15/26
AG
TxAg20 said:
ETA: She was a 1099 employee to the client, vis-a-vis an intermediary, at the time she was paid the bonus. Why would they be expected to bonus her via W-2?

I'm guessing she nets more of the bonus by paying the self employment tax on the 1099 than if the payor of the bonus had run it through the company that farmed her out.

I'm not an accountant, but a person who used to pay bonuses to both W-2 and 1099 employees. If someone complained to me about the tax consequences/treatment of their bonus, I would be reluctant to give them additional bonuses in the future.

She was a service provided, not an independent contractor. The 1099 should have gone to the W2 employer, not the W2 employee.
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TxAg20
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In reply to Sims • 9:27a, 1/15/26
AG
But the W2 employer would say the 1099 doesn't match what they were paid because the bonus amount went directly to the OP's wife instead of through the W2 employer.
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Sims
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In reply to TxAg20 • 9:32a, 1/15/26
AG
TxAg20 said:
But the W2 employer would say the 1099 doesn't match what they were paid because the bonus amount went directly to the OP's wife instead of through the W2 employer.

Yeah, there's some accounting adjustments to be done.

Client needs to reclassify the payment as having gone to the W2 employer, W2 employer needs to show the passthrough as having been received from the Client and paid to employee as wages. Employee needs to be informed of the FICA and withholdings that would have come out of that check. W2 employer needs to do their employer side withholding.

It's a big dang mess. I'd file the 8919, do the proper fica on employee end and move on.
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agstudent
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In reply to Sims • 9:44a, 1/15/26
AG
Sims said:
TxAg20 said:
But the W2 employer would say the 1099 doesn't match what they were paid because the bonus amount went directly to the OP's wife instead of through the W2 employer.

Yeah, there's some accounting adjustments to be done.

Client needs to reclassify the payment as having gone to the W2 employer, W2 employer needs to show the passthrough as having been received from the Client and paid to employee as wages. Employee needs to be informed of the FICA and withholdings that would have come out of that check. W2 employer needs to do their employer side withholding.

It's a big dang mess. I'd file the 8919, do the proper fica on employee end and move on.

That's about what I was thinking needed to be done. Was hoping to avoid all the paperwork by all parties, but it sounds like that's the only way forward.

Really appreciate the assistance from everyone!
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deadbq03
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10:01a, 1/15/26
AG
Umm… there is a way to avoid paperwork by all parties… with you doing the correction form they mentioned.

If this is your wife's new/current employer (or will be soon), you should definitely not bother them with corrections on their side. They basically did you a favor (more money) by doing it this way because if they had gone through the contracting firm, that firm would've taken a cut. Also, if you make both parties aware of this error, it potentially damages the relationship between the contracting firm and your wife's new company, because honestly, they probably weren't allowed to do it this way based on the contract.

Be happy you made more money, do the legwork yourself, and don't bite the hand that feeds.
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