I have a 1099 contract labor employee that I am converting to W4 employee with taxes withheld. He has already been paid for two weeks. Should I deduct the taxes that should’ve been taken out from his future pay checks? How should I go about this
The important question is what status the individual was when performing the work. The IRS will not blink an eye at receiving both a Form 1099 and a W-2 at the end of the tax year for the same individual. Many companies eventually hire former subcontractors.
Withhold no taxes on payments as a subcontractor, and report the full amount paid on the 1099. Begin withholding as of the date the individual became an employee. Report gross pay, all withholding, etc., on the W-2.
The only potential issue is whether the individual was really a subcontractor during the first two weeks. There is no definitive test, but rather a list of a dozen or so factors that are considered. You can find those on the IRS web site.
If he has been 1099 for two weeks, can I back track and put his as a W4 employee?
If you have already made even a single payment, you would be asking for trouble from the tax man, because you already did not withhold income, Social Security, and Medicare taxes (not to mention state and/or municipal taxes) from the payment. And don’t consider asking the person to give the money back so you can turn it around and pay him/her as an employee, because there is a paper trail. Submitting a Form 1099 is trivial in comparison to the problems you would create by trying to turn this person into an employee 2 weeks earlier. (In fact, most things about subcontractors are trivial in comparison to employees. That’s why the business model is so popular.)
Now, if you have not yet made any payments, you are in a different situation. You can make the effective date of employment earlier, make all payments as employee wages, and properly withhold all taxes.
You should definitely consult a tax advisor. Alternatively, call the taxpayer help line of both the IRS and your state/local revenue department for guidance.