The IRS has laid out specific rules for an employee to be classified as an independent contractor, however employers are increasingly expanding this definition for their own benefit.
However, employers simply cannot declare someone as an independent contractor. There are certain criteria defined by the IRS and the Department of Labor that must be met before such a designation can be made and issued a 1099 at the end of the tax year. Employees that believe they have been misclassified as such can ask themselves a few questions to help determine their status.
The IRS looks at the relationship between the employee and employer based on a series of questions such as:
- Was there specific training provided to the worker?
- How does the worker receive assignments?
- Who determines the methods by which the assignments are performed?
Those are just some examples, but there are many other questions the IRS uses to make a determination.
According to the IRS:
- An employee is anyone who performs services for an employer and their actions, in regards to what will be done and how it will be done, are controlled by the employer
- An independent contractor is defined as such the payer or employer has the right to control or direct only the result of the work done, and not the means and methods of accomplishing the result
The important point for you to remember is that just because an employer identifies you an asCredit: By Joshua Doubek via Wikimedia Commons independent contractor does not mean it is correct, or legal. Many employers simply do not know the rules set forth by the IRS. For instance, if an employer hires a painter to paint their office, that person is an independent contractor and should be paid as such. They have a verifiable business, a predetermined amount of work and once that job is finished, they do not return to that work site.
However, if someone is working for a company every day for months, or years, has a defined job, has attended company provided training, has an assigned desk and gets paid on a regular basis, that person should not be treated as an independent contractor. The advantage to the employer when hiring an independent contractor is that they do not have to pay employment taxes on workers labeled as such, nor pay into the state unemployment and worker's compensation funds.
What You Should do if You Feel You Have Been Misclassified
This can be a touchy situation because the last thing you want to do is get into a confrontation with your current employer. So you have to go about this diplomatically.
The first thing you should do is talk to your employer. If you have an on-going working relationship with them, they may simply be unaware of the law and their potential liability. You could actually be doing them a favor. The IRS has been cracking down on this practice in recent years and the fines and back taxes can be substantial.  Most people are reasonable and if you explain the situation, most will agree to pay you on a W-2 instead of a 1099.
However, expect your pay to be less because they will now be paying half of the employment taxes (6.2% and you pay 6.2%), plus paying into the state funds, and perhaps providing health, disability and vacation benefits.
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New Bill in Congress to Address Misclassification
Currently, there is a new bill that was introduced in Congress in November 2013 that would increase the enforcement and penalties for employers found guilty of misclassifying workers.
The new bill also would also:
- Include those who provide services through a corporation or LLC if they are required to create or maintain such entities as a "condition for the provision of such labor or services" in the definition of non-employees
- Impose triple the damages for willful violations of the minimum wage or overtime laws where the employer has misclassified the worker
- Establish a Federal website sorely dedicated to issues involving misclassification
- Impose additional penalties on employers that misclassify employees for unemployment compensation purposes
- Allow the Department of Labor to report misclassification information to the IRS
- Allow the Department of Labor to conduct targeted audits of certain industries with a history of misclassifying employees as independent contractors
Working as a contractor for the last 10 years, I have developed a few rules along the way. I never accept any offers that say they will pay me on a 1099 because independent contractor taxes are different. I personally do not want the hassle of having to pay my taxes quarterly. But more importantly, when the contract ends, and it can end suddenly and unexpectedly, if I do not have another contract lined up, I will not be able to collect Unemployment Insurance if I need it.
So my advice is to always ask to be paid as a regular employee unless you have a defined business, complete with a home office, business cards and everything that the IRS looks at to allow you multiple deductions off your taxes. In that instance, if may be beneficial to be paid under a 1099 situation, but the position must still meet the rules set forth by the IRS for independent contractor.
If you in a position where you preferred to be paid on a W-2, but your employer, or potential employer, is only offering an independent contractor position, then you have to do what you have to do if you need a job. After employment begins, your only recourse would be to file a form SS8 with the IRS and answer a series of questions about your job and they will make a determination on your behalf, but it can take 6 months or more.
After you receive that judgement, you can use it as a bargaining chip against your employer because more than likely, the IRS will be making a few calls to inquire about you and other employers associated with that employer.
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