Dear Liz: I just received my tax forms from my employer for last year. I was originally a W-2 employee, paid hourly, as a receptionist. But it seems that at some point during the year, my employer changed me to a 1099 employee without telling me or having me fill out paperwork. After researching the characteristics of a 1099 employee, I found I do not qualify at all. I am upset that I will have to pay taxes on this income, since I thought they were being withheld from my pay. Do I have any recourse?
Answer: Your employer has put you in an impossible situation. If you tell the truth, you’ll tip off the IRS to the company’s deception, which could put your job in danger. If you go along with the lie, you’ll have to pay your boss’ share of taxes in addition to your own.
“The good news is the IRS is really busy and probably won’t [audit your employer] for a couple of years,” said Eva Rosenberg, an enrolled agent who runs the TaxMama site. “By then, you should have a better job elsewhere.”
To fix this, first report your income from this job as “other income” on line 21 of your 1040 tax return, Rosenberg said.
If you got both a W-2 and a 1099, you can use IRS Form 8919 to pay only your share of the Social Security and Medicare taxes. You’ll pay 7.65% instead of the 15.3% you normally would pay with 1099s, Rosenberg said. You’ll have to select a “reason code” for why you’re using the form. You can use code H, which says that the amount on the 1099 form should have been included as wages on Form W-2.
If you got only a 1099, you’ll need to fill out Form SS-8 to explain why you’re an employee, not a contractor, Rosenberg said. Then use Form 4852 as a substitute for your missing W-2. Use the data from the last pay stub that shows your year-to-date withholding as a W-2 employee so you can get credit for those taxes paid. This process is complicated but is the approach a tax pro “would and should use” when an employee is misclassified as an independent contractor, Rosenberg said.
The forms you’re filing will alert the IRS to your company’s chicanery. Some employers pretend that their employees are independent contractors as a way to reduce the company tax burden and perhaps dodge new health insurance requirements. It’s a scam that tax authorities are keen to uncover and penalize
I completely disagree with your advice to the employee who was changed to an independent contractor status without her knowledge. First it is against state and federal labor laws to for an employer to do this. It is well understood it is a ploy by the employer to save money by illegaly avoiding taxes, unemployment compensation and workers comp insurance. The IRS and state revenue depts., in addition, have specific sets of rules that a person has to conform to to be considered an independent contractor. If she were to be “let go” she may not qualify for unemployment compensation or if she were injured at work she may not be covered by workers comp insurance. She needs to find another job as soon as possible and report this to her state labor board when she leaves her position. There may be other employees whom this employer has done this to. It is not fair to the employee that she should have to pay her full social security and medicare tax. Although the IRS may take a year to follow up, state labor boards frown on this practice and usually will investigate very quickly and assess penalties to the employer as well as force them to pay the taxes they should have paid in the first place. Your answer to this person seems to be “oh well you can keep your job, you can pay the tax and its your responsibility and lets let the employer off the hook”. To suggest to the person just cover it up by filling out forms with the IRS is disingenuous and may lead to penalties to the employee.
Actually, the advice given is exactly the opposite. Tax pro Eva Rosenberg is telling her to file the forms that will tip off the IRS to the employer’s deception. Given the backlog of these cases, she’s saying it will take awhile for the IRS to follow up, so she has time to find another job.
This happened to me about 20 years ago, and when I filed a complaint with the EDD – http://www.edd.ca.gov/ – not only was their response slow and lacking, but it gave my employer a heads up to my complaint, which he then used against me in every possible way he could muster. In the end, nothing ever came of it and he was never punished that I know of. But don’t fear your employer if you have options to get another job or have a spouse who can cover if you’re without for a while. But if at all possible, don’t wait. Bottom line is this is terrible abuse by your employer. And Pam is right… there are other employer-paid benefits that they may be avoiding which would put you in even more jeopardy. I’m a small business owner who plays by the rules and it just chaps me to see others taking advantage of their employees. Good luck to you, and if your coworkers are having the same issue, it would be so great if you banded together.
Several big employers–including two of my exes, the LA Times and Microsoft–got their hands slapped years ago for paying employees as contractors. While there’s still some grey area these days, there’s not much…and in this case there’s none.
What I did not see in this response is how can a person NOT see that taxes are not being taken out????? Her paycheck HAD to reflect her changed status!!!! Did she not look at her paycheck??????????? Her paycheck HAD to be gross wages!!!!! That’s what a 1099 means….you earn X, X goes on the 1099….not after any taxes, etc., taken out!
It’s been my experience that many people don’t look closely at their paychecks. Low-wage earners might not have much if any income taxes withheld, so the difference would be payroll taxes. I agree that those disappearing should be enough to make someone look twice, but that’s not always the case.
If the letter writer’s employer (like mine and many others these days) distributes pay stubs electronically, it’s very easy to get in the habit of not looking at those. Before, I was handed a physical piece of paper every two weeks with all the information about my tax withholdings, insurance premiums, etc. Now, to access that same information, I have to log into the payroll site (which, just to make things complicated, is completely separate from my email, timecard, or anything else that I actually need to access on a regular basis).