Employees Misclassified as Independent Contractors

[momm2500]

My question involves business law in the state of: PA

a small family owned business was paying workers as sub contractors (gave them 1099) to avoid paying all the taxes on them (social security,medicare,fica,etc.) Now some of those employees filed paperwork with the IRS stating they were considered employees. The IRS made their determination that they should have been listed as employees. so where do we go from here? do we owe these people more money because they are employees? (they dont work for the company any more) can those employees come after the business and state that if the appropriate taxes were taken out they could have received a larger refund or even a refund at all?

[Mr. Knowitall]

It is likely that the business owes the employees additional compensation due to its making them pay self-employment taxes, rather than withholding taxes and paying matching taxes as legally required.

It is very likely that the IRS will pursue the business for any taxes not properly withheld, along with interest and penalties. That amount can be substantial.

The business should consult a tax lawyer to try to figure out its best way out of this situation.

[mmmagique]

I agree.
I wouldn't blame the employees if I were you, the IRS has certain ways to find out when this happens. I know I received a long questionaire regarding a former employer who pulled this stunt on me and any other employee with whom they could get away with it.
There are very specific rules as to who is considered an employee, and who is an independent contractor. You have to follow those rules. They were established by the government to protect people from being taken advantage of.
If you are going to call people independent contractors, you really need to know what one is.
Very basically, if an employee has to work at a certain place during certain hours, uses your equipment, is under an obligation to train under your rules, and doesn't spend their own money/resources to get the job done, they are probably an employee. This is an extremely basic overview of it though.

According to: http://jobsearchtech.about.com/od/la...aa121800_2.htm

"Although all agencies concerned are always on the lookout for violators, the IRS takes the lead here too, and aggressively so. If it finds a company guilty of misclassifying its workers, the IRS might require the company to pay all back withholding taxes plus interest, even if the misclassified independent contractors have already paid their taxes. The IRS might also levy huge fines and press criminal charges against the company officials. Once the IRS moves in, it opens the doors for the other agencies to collect their due. If there's anything left, the misclassified independent contractors might collect, too. Misclassified independent contractors have successfully sued for unemployment insurance, stock options, overtime pay, retirement benefits, profit sharing, disability payments, workers' compensation and more, in so-called "permatemps" and related lawsuits."

[llworking]

My question involves business law in the state of: PA

a small family owned business was paying workers as sub contractors (gave them 1099) to avoid paying all the taxes on them (social security,medicare,fica,etc.) Now some of those employees filed paperwork with the IRS stating they were considered employees. The IRS made their determination that they should have been listed as employees. so where do we go from here? do we owe these people more money because they are employees? (they dont work for the company any more) can those employees come after the business and state that if the appropriate taxes were taken out they could have received a larger refund or even a refund at all?

While the others are not wrong, here is what is most likely to happen:

The IRS has ruled that those specific people were employees. The IRS is going to go after you for the employer's share of the Social Security and Medicare taxes that you should have paid, and probably Unemployment compensation as well.

That information will filter down to the state, and you will be required to pay state unemployment compensation also.

Its also very possible that the IRS will audit you to determine who else should have been classified an an employee.

My recommendation is that you immediately get ALL of your employees set up officially as employees and paid as employees. You may want to use a payroll service, as their services are very economical, and they take care of pretty much everything for you. Yes, its going to cost you some extra money, but in the long run, you are going to be much better off.

[Bubba Jimmy]

My question involves business law in the state of: PA

a small family owned business was paying workers as sub contractors (gave them 1099) to avoid paying all the taxes on them (social security,medicare,fica,etc.)

This is a good illustration of the lesson that employers cannot simply decide what ever they want to in order to avoid paing the employment taxes. If it was that simple, no company would pay taxes that it legally could avoid. The facts and circumstances of the work determine whether a worker is an employee or an independent contractor, not the employer's desire to push the tax burder onto the worker.

[Chippewa]

Go to the UCC as it was adopted by PA and look at the common law factors of an employer/employee relationship. More than a year ago the IRS commissioner made it public that the misclassification of employees as independent contractors was going to be a priority. The Treasury Department has been working with all 50 states on this project.

[momm2500]

ok so the IRS classified that they are employees. Is the business now required to send them new w-2's or some type of documentation that shows the business paid the employer portion of taxes? the employees already paid to the IRS and the state their portion of social security and medicare estimated taxes.

[llworking]

ok so the IRS classified that they are employees. Is the business now required to send them new w-2's or some type of documentation that shows the business paid the employer portion of taxes? the employees already paid to the IRS and the state their portion of social security and medicare estimated taxes.

If you are talking about former employees, for former years, no you don't need to send out any corrected paperwork.

If you are talking about current employees, for the current year, then yes, you have hopefully been withholding proper taxes since August, and should be issuing W2s.