Independent Contractor or Employee? Ask the IRS
L.M. SIXEL, Staff
The boss says you're an independent contractor. You think you're an employee. What do you do?
You can ask the Internal Revenue Service (IRS) to decide.
Workers can fill out a “determination of worker status” form, known as an SS-8. It doesn't cost anything, and you get the definitive word on who is responsible for federal, state and local taxes, eligibility of overtime pay as well as benefits such as health insurance. And did I mention unemployment insurance benefits and workers' compensation?
If you're misclassified as an independent contractor, filling out a simple form to find out whether you're really an employee could translate into thousands of extra dollars in your pocket and save you from hours of irritation.
That's because when the boss classifies a worker as an independent contractor, the worker doesn't receive unemployment insurance benefits or workers' compensation coverage and is responsible for paying the entire tab for Social Security and Medicare taxes – that means paying 15.3 percent rather than 7.65 percent.
If you earn $100,000 a year, that's an extra $7,650 in taxes. Ouch.
Most workers probably aren't thinking about the tax liability though. They're thinking more about overtime eligibility and benefits such as health insurance, their 401(k) plans and other perks that go to employees but not independent contractors.
Rules of employment
What makes a worker an employee is complicated, determined by several tests used by courts and the government. Generally, employees are supervised, and they're told when and where to work and which tools to use, according to rules published by the IRS.
Independent contractors are typically given a project to do but not much in the way of direction or rules for how it's done. They often bear financial responsibility, and they're free to work for others and cover their own expenses.
Misclassification of construction workers is common. But that doesn't mean all workers are unhappy about their status.
Initially a lot of workers don't think about it. All that money. No taxes taken out.
But at the end of the year, they see the tax liability and that they have to pay the whole amount for Social Security and Medicare.
It's hard to compete with a company that is misclassifying its employees, as this technique can save an employer up to 30 percent of payroll costs.
It's impossible to know how much the misclassification is costing governments in terms of tax revenue.
There was 2001 data from the IRS that shows an income tax gap of as much as $353 billion – the difference between what's owed and what's collected. A good portion of that stems from misclassifying workers as independent contractors who don't pay their taxes.
Courts also can help
Filling out an SS-8 request doesn't necessarily solve matters.
Sometimes the worker doesn't answer questions completely or the information is wrong. A court can handle the issue as part of a lawsuit involving the nonpayment of overtime, minimum wage or employee benefits.
There's another benefit to incorporating the request as part of a lawsuit: under those federal wage and benefit laws, employers can't retaliate against you for asserting your rights. The IRS form doesn't carry that anti-retaliation provision.
If you have questions about your rights, or feel you need to discuss your situation with a qualified Employment Attorney, contact us today.