Independent Contractor Or Employee?

[bobby623]

I worked from my home as a writer/graphic designer for an out-of-state greeting card company for several years under an "Independent Contractor" agreement. I owe a big back tax debt from the years 2000-2003, because I got behind on my estimated tax payments and then my client cut my pay significantly in 2003 (breeching the contract).

After reading another post on this forum about the IRS' definition of an Independent Contractor vs. an employee, I'm beginning to think that I probably should have been considered an employee all of those years and that my client fradulently considered me an independent contractor so that he wouldn't have to pay my withholding.

According to my contract, I had to work for the client exclusively. In addition, the contract specifies my hours. I had to work 80+ hours a week, with only one day off a month, and two weeks paid vacation a year. I think, these requirements would put me in the "employee" definition. What do you think?

I did have to pay my own expenses...my own computer, internet service etc, and I had to license costly materials out of my own pocket (which I, of course, reported as business expenses on my 1040s). Sometimes, however, the client would license materials.

Anyway, I'm wondering what would happen if the IRS, who is now considering an installment agreement request on the back taxes, determines that I was an employee. How would it affect those tax years that I'm behind on, because he would have had to pay self-employment taxes? What about some of the penalities and interest I owe on my back taxes? Would they become his responsibility?

Thanks,

Bobby

[Mr. Knowitall]

You should not anticipate that any reclassification will cure your arrearage - if I were you I would resolve the arrearage and, if later reclassified, file amended returns to seek the refund owed. If you believe you are an employee, you should consider filing a wage and hours claim with your state's department of labor, which will likely investigate the issue. You also may wish to consult a plaintiff-side labor lawyer - being misclassified as an independent contractor while being required to work far more hours than can be imposed by law sounds like a potential basis for a lawsuit.

[bobby623]

Mr. Knowitall,

Thanks for the advice. I've filed an installment agreement request. So I'm working on the tax debt.

A couple of years ago, I did seek a labor/contract lawyer to pursue a breech of contract suit. He looked into the issue about the number of hours this employer was making me work and found that there is one exception to the law--the computer industry. There is no set limit on hours there. Technically, I worked for a web company and created content for their website, and so it fell under this category.

Amazingly, this lawyer never brought up this Independent Contractor vs. Employee issue.

I never pursued the breech of contract suit out of fear that it would cost me more than I'd win and there was a question as to collectibility. :-)

Thanks again,

Bob

[Mr. Knowitall]

A couple of years ago, I did seek a labor/contract lawyer to pursue a breech of contract suit. He looked into the issue about the number of hours this employer was making me work and found that there is one exception to the law--the computer industry. There is no set limit on hours there.

That sounds like utter nonsense to me - a disservice by your lawyer. Do you happen to have a citation to the law which supposedly exempts the computer industry from state and federal labor laws and regulations?

[Fxston]

Bobby, you sound very confused, so let me help you out and expand a little on Mr. Knowitall's response.

When there is a question of proper classification as to whether a person is an employee vs. independent contractor, the Department of Labor will look at a number of factors to make that determination. They say there is no one test or criteria that is dispositive. Some of the things that are looked at is the amount of supervision, whether you set your own hours, and whether you use your own tools or not. In your case, I would say that if you got any benefits, like paid vacation time, you were treated as an employee. Employers that purposely abuse the independent classification can be fined and forced to pay all the payroll taxes due retroactively. Unfortunately for you, even if the state or federal department of labor rules that you are an employee, there still would be no withholding of state or federal income taxes to extricate you from your situation.

With regards to the Fair Standards Labor Act which was amended a couple of years ago, there was an exception to the over time rules that made "professionals" like lawyers and accountants exempt from over time rules. There was another specific exception having to do with computer professionals. I don't believe that the amendment changed this much, if at all. This is what your lawyer was referring to. I am not sure if it still exists, but there was an exception to the exception that if an employer treated an otherwise exempt professional as an hourly employee, then that employee would a non-exempt employee. You should be able to find additional information on the websites for your state and the federal department of labor. Doing an Internet search may give some legal websites that will explain the FLSA and how it is applied.

Lastly, while most states practice "at-will" employment, you may be a contract employee where the contract may give you greater rights than an at-will employee.

I should have also mentioned that if you are determiend to be an employee, your "employer" will also be responsible for state and federal unemployment taxes making you eligible, but not necessarily qualified, to receive unemployment insurance benefits when your employment ends, where you would not otherwise be entitled to as an independant contractor or self employed person.

[Mr. Knowitall]

Even if the person could ostensibly have been classified as an exempt employee, this person was instead classified as an independent contractor and thus no such exemption could apply. An independent contractor can work 80 hours if he or she chooses, but the company hiring the independent contractor cannot force that to happen, let alone define their working hours.

If this were me, I would consider filing a wage and hour claim with the state department of labor, most likely after consulting a lawyer who practices in that field of law.

The consequence would likely be that I wouldn't be working for the outfit any longer, but... some loss.

[bobby623]

That sounds like utter nonsense to me - a disservice by your lawyer. Do you happen to have a citation to the law which supposedly exempts the computer industry from state and federal labor laws and regulations?

Mr. Knowitall,

I don't know where the lawyer got that information. This was three years ago. He only said that he'd researched it and that the computer industry was exempt. He mentioned that it was a newer law. I don't know if he meant that it was a Missouri law or federal. He'd hoped to bring fraud charges against the employer before bringing a civil suit against him for breech of contract--that's why he researched it.

Thanks,
Bobby

[bobby623]

Fxston,

You're right. I'm confused about these issues. I will check into those sites. Thanks for the suggestion.

At any rate, I haven't worked for this client for more than a year now. I worked for him from 2000-2004. He wanted me to continue with him in 2005, at another pay reduction, but after everything he did to me, I walked. In addition, he got full rights to all of my creative work, which he is still profiting off of, and so I didn't want to continue producing material for him.

I don't really want revenge, but he is partly responsible for the financial mess I'm in. So, that's why I was wondering if he'd be liable for some of this large tax debt I owe.

Thanks,

Bobby