If you can avoid it, never filed "married filing separately."
It is the worst possible filing status. It sounds like your wife's employer wants to consider her a contractor and avoid paying FICA, unemployment, workers comp taxes and the like. Unless she is being paid more than what an employee would get, it's a rip off on your end.
If she gets a 1099-MISC for her work, you'll pay regular income tax on that as well as the nice 15.3% FICA tax. Plus, if she works there a year and gets laid off, she can't file for unemployment benefits.
If it were me, I wouldn't go 1099 unless I got a nice premium for it - at least 30%.
On the flip side, depending on what your wife does for the company and how the work is performed, the company may have no choice to pay her as an employee. You can't call someone a contractor and make them come into the office every day, set their hours, pay by the hour and tell them how to do their job.
ETA: The good Colonel below has an extra zero - the limit for filing a 1099-MISC is $600 in a year.