Don't Let Your Employer Misclassify You as An Independent Contractor
The Federal Government and President Obama have announced that they with the IRS will be cracking down on enforcement of employers that misclassify their employees as 1099 independent contractors rather than W-2 employees. With a W-2 employee, the employer deducts federal and state employment taxes for the employee while with a 1099 contractor, the employee is responsible for paying their own taxes. What is most disturbing about this trend by some employers is that in many instances the employees do not even know that they are being claimed 1099 contractors until they get a large tax bill.
Companies can hold down labor costs by as much as 30 percent if they use independent contractors, because they don't have to pay Social Security and Medicare taxes, provide vacation or sick leave, pay for workers' compensation and unemployment compensation insurance, or follow minimum wage or overtime provisions. Additionally, employers are protected from potential legal troubles since independent contractors aren't protected by Title VII of the Civil Rights Act which prohibits discrimination.
So how do you know whether you should be classified as an employee or an independent contractor? Well the IRS has some regulations that address this issue.
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
In the event that you believe you employer has misclassified you, you can file an IRS Form SS-8 with the Internal Revenue Service. This form can be filed by either an employee or employer. The IRS will review all relevant factors and make a determination whether an employee is an independent contractor or employee. The determination can take up to six months but if the IRS determines that you are an employee they can than force your employer to pay required payroll taxes on your behalf.