I have met with a lot of clients this year, and there is a growing trend that most people need to be made aware of. For some various reasons (we will get into them later), workers are being misclassified. This seems to happen more in the creative industry, but it is making its way into the main stream. This is a misunderstanding by employers of the rules, and can cost you several thousands of dollars. However there is a remedy. So, the story goes that you get hired as “temporary help,” with a company. As I said, it is usually in their creative department, but it is starting to seep into other fields. An employer will hire you and treat you as an independent contractor. After a few months, that SAME employer will hire you on as an employee. There are SEVERAL reasons why this is bad for you.
First of all, the IRS takes the stance that if you work under someone’s direction, you are paid by the hour or by the piece, if you use your employer’s equipment or tools, you have set hours that you are supposed to work, then you are considered an employee of that company. NO QUESTIONS ASKED. For instance, you go to work for a company in an office setting. You have to be at work at 8:00 am and you leave at 5:00 pm. The company provides you with a desk, a computer, and other equipment, you have a boss or a supervisor that you report to, and you get scheduled breaks, you are that company’s employee. The reason that an employer doesn’t want to classify you as an employee is that they are responsible for half of your Social Security and Medicare Tax, they have to pay both Federal and State Unemployment, and you might be eligible for benefits. So, what happens is that they pay you as an independent contractor, not withholding any taxes, and thus are not responsible for any employer related taxes on what they are paying you. They don’t have to pay you overtime, and they don’t have to pay you any benefits if the company has benefits. All of this is fine until you have to pay your taxes.
In this situation, you receive a 1099-MISC with an amount reported in the Non-Employee Compensation box. Employers now a days call it “freelance” work. You have to, not only pay income tax, but you have to pay 15.3 percent in Social Security and Medicare Taxes. If you were an employee, you would only be responsible for 7.65 percent of Social Security with the additional 7.65 percent paid by your employer. Because your employer misclassified you as a self-employed individual, YOU are responsible for all of these taxes. . If you are in the 15 percent tax bracket, you could be paying upwards of 30 percent in income taxes. What makes matters worse, is after this “probation period,” your “employer” will then bring you on as an employee. As I see this more and more, I cringe. Do these employers have accountants?
Let me tell you what the IRS says about this. First of all, with the rules I mentioned before about your work conditions, the IRS will classify you as an employee. But there is more. If that wasn’t reason alone for the IRS to reclassify you, if your employer has hired you on as an employee after this probationary period, the IRS will certainly reclassify you. The IRS’s position is that once your employer considers you an employee, you are ALWAYS an employee. This whole situation begs the question: Why is this going on so much? The answer is, I don’t know. Perhaps one employer is doing this, and other employers see that they are getting away with it so they are following suit.
What should you do if this is happening to you? Very simple. When you file your tax return in April you file Form SS-8 with your tax return, and let the IRS determine your employment status. On your tax return, you will be responsible for ½ of Social Security and Medicare, but the IRS will go after your employer of the additional amount. I do want to caution you on something; you should only file this form if you are no longer working for that employer. Filing this form will, almost, certainly get you fired. When you file this form the IRS will launch a full investigation of your employer, and that is not pretty. The employer will not only be responsible for paying their share of Social Security and Medicare, they will be hit with a 100 percent Trust Fund Penalty, for misclassifying you in the first place. This may seem farfetched, but I file, at least three of these forms a year. Never once have I had the IRS come back and say that my client was wrong.
If this is going on with you now, or has gone with you, and you want to fight back, give us a call at 1-855-IRS-2-911, or email us at firstname.lastname@example.org. Let YOUR Voice Be Heard®