Being misclassified as an independent contractor instead of an employee for legal and tax purposes can be very costly. Among other things, it means that you'll:
- have to pay all your Social Security and Medicare taxes out of your own pocket (employers must pay half of these taxes for employees, but not independent contractors
- be ineligible for unemployment benefits (and your employer won't have to pay for unemployment insurance for you)
- be ineligible for worker's compensation benefits (and your employer won't have to pay for workers’ comp insurance for you)
- have none of the workplace rights that employees usually have, such as a right to a minimum wage, overtime pay, sick pay, and rest breaks
- be ineligible for healthcare coverage as an employee under Obamacare starting in 2014.
Employers can save a lot of money by classifying workers as independent contractors instead of employees. That's why many of them do so, even if the workers involved should really be treated as employees under the law.
Is there anything you can do if you think you should be treated as an employee, but have been classified as an independent contractor by your employer? Yes, there are lots of things you can do; and they can often be very effective.
For a detailed discussion of which workers qualify as independent contractors, see the Nolo article "Employees vs. Independent Contractors."
Talk to your Employer. First, you can try to talk to your employer to see if it will review your classification and reclassify you as an employee. Explain that you think you've been wrongly classified as an independent contractor. At the very least, you should get an explanation as to why they think you are a contractor, instead of an employee.
Get the IRS Involved. If trying to talk to your employer doesn't work, you can contact the IRS. Workers who believe they have been misclassified as independent contractors may request that the IRS determine their employment status for federal tax purposes by filing form IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. There is no fee for filing.
You answer a series of questions on this form about the nature of your work and how your employer treats you on the job. After the IRS receives the form, it will contact your employer to get their version of the facts. It will then determine what your status should be for purposes of federal employment taxes and income tax withholding. The decision made by the IRS will be binding on the IRS. It is not binding on your employer, but any employer who ignores the IRS's determination will be in for trouble.
One thing to keep in mind is that the IRS may disclose your identity to your employer, which might not make the employer too pleased with you.
File Your Tax Return with IRS Form 8919. Independent contractors have to pay all their Social Security and Medicare taxes themselves. In contrast, employees have half of these taxes paid by their employers. If you think you've been misclassified as a contractor, you can avoid having to pay more than half of these taxes yourself by filing IRS Form 8919, Uncollected Social Security and Medicare Tax on Wages.
You use Form 8919 to figure and report your share of the uncollected Social Security and Medicare taxes due on your compensation if you were treated as an employee instead of an independent contractor. By filing this form, your Social Security and Medicare taxes will be credited to your Social Security record. However, you must be able to claim one of the reasons below before you can file Form 8919:
- You filed a Form SS-8 and the IRS has determined that you are an employee.
- You were designated a "section 530 employee" by your boss or the IRS prior to January 1, 1997. A 530 employee is a person the IRS determined to be an employee prior to January 1, 1997 but whose employer has been granted relief from payment of employment taxes.
- You received a letter from the IRS that states you are an employee.
- You were previously treated as an employee by this boss and you are performing services in a substantially similar way and under substantially similar direction and control.
- Your co-workers, performing very similar services under similar direction and control, are treated as employees.
- Your co-workers, performing very similar services under similar direction and control, filed Form SS-8 for this boss and received a determination that they were employees.
- You filed Form SS-8 with the IRS and have not received a reply.
File an Unemployment Insurance Claim. If you've been fired or laid off by your employer, file an employment insurance claim with your state unemployment agency. Explain that you've been misclassified as a contractor instead of an employee, and the agency will investigate. If it determines you should have been treated as an employee, you'll be entitled to unemployment insurance and your employer will be fined and have to pay back insurance premiums. A list of Unemployment Office Locations is available at the credit.org website.
File a Workers' Comp Claim. If you've been injured on the job and your employer refuses or fails to provide you with workers' compensation coverage, you should file a claim with your state workers' compensation insurance agency. A list of state workers' compensation agencies is available at the United States Department of Labor website.