I Am Being Misclassified

[PayrolGuy]

Don't forget unpaid Federal unemployment tax that would not have been paid. And because it wouldn't have been paid in a timely manner it would be at the rate that doesn't credit the employer for state UI so instead of .8% the tax would be 5.4%(?) plus penalties and interest.

[Taxing Matters]

Don't forget unpaid Federal unemployment tax that would not have been paid. And because it wouldn't have been paid in a timely manner it would be at the rate that doesn't credit the employer for state UI so instead of .8% the tax would be 5.4%(?) plus penalties and interest.

For purposes of clarification if the state unemployment tax is not paid timely the employer may not get the state credit on on the Federal Unemployment Tax Act (FUTA) return. Of course, if an employee is misclassified that likely means the employer is not paying the state unemployment tax on time, with the result that the FUTA would be higher. There are, of course, penalties for failing to file and failing to pay the FUTA tax return on time.

[llworking]

I think you just confirmed what I posted. All the IRS does is to replace the 1099 with a W-2 on a misclassification. And if the IC has been paying the self-employment and Medicare tax, they don't much care that the W-2 has zero deductions for those taxes.

It is the states that will do something about the misclassifications because they do not get payments into the UE fund and the workman's compensation fund.

Actually the feds DO care if there are zero deductions for Social Security and Medicare taxes. They make the employer pay those. If the employee voluntarily signs paperwork to indicate that those taxes have been paid by them, and the employer has refunded them for the employer share, then the employer does not have to pay them again, but the W2 still needs to show those as deducted.

[budwad]

I do agree, though, that the test under federal law that applies for tax determinations is different from what states use for other purposes like unemployment compensation, worker's comp, etc. While all the tests have some things in common, the details do vary a bit.

The tests do vary a bit but they are essentially the same as those adopted by (and being adopted by) the states.

The current IRS test is here. It is pretty much identical to the ABC test the states are adopting or have adopted.

But what does this mean to the misclassified worker? I say nothing. The company can be held to all sorts of penalties and interest but the employee (misclassified) has to sue in civil court to get what was due them. And if they do, they will be in the ranks of the unemployed.

[PayrolGuy]

It means going forward that the employee will likely be classified properly. I've got three clients right now that are here because they were found to be misclassifying their employees. When the state and feds dropped the hammer on them they didn't want to do all of the tax reporting and deductions so they came to us. In all cases, they paid all of their state and federal penalties and promised to sin no more. The fact that they went with us had a lot to do with getting the state off their back.

[Taxing Matters]

But what does this mean to the misclassified worker? I say nothing.

I say it depends on the circumstances. If this misclassified worker did not pay the FICA taxes on his/her earnings then the IRS change in classification and pursuit of the employer will relieve the worker of those taxes and the employer will have to pay them instead. And going forward the employee would be treated properly as an employee, with the required tax withholding, etc.

But you are right that it comes with a risk that the employee may end up being fired over forcing the issue. The law does not protect the employee from retaliation for reporting the employer to the IRS (nor do many states protect the employee for reporting the employer to worker's comp, unemployment, etc). Whether the law should provide that protection is something over which I'm sure people would disagree. But if the employee wants to stick it to the employer, especially when he or she is leaving anyway, and make things better for his/her fellow employees going forward, there would certainly be good incentive to take that risk. If the employee really needs that job and is sure he or she can't get another job out there where he or she would be treated better, then that termination risk may be more than the employee is willing to take. On the other hand, the employer has to weigh how easy it would be to replace that worker going forward. If the person has skills that are difficult to replace or is simply a much better worker than the employer usually gets, the employer may decide to keep the employee despite being ticked off at being reported and having to pay the price of misclassification. Every situation is a bit different.

[budwad]

I will agree with you here. The choice is a hard one for an employee to make.

[llworking]

I say it depends on the circumstances. If this misclassified worker did not pay the FICA taxes on his/her earnings then the IRS change in classification and pursuit of the employer will relieve the worker of those taxes and the employer will have to pay them instead. And going forward the employee would be treated properly as an employee, with the required tax withholding, etc.

But you are right that it comes with a risk that the employee may end up being fired over forcing the issue. The law does not protect the employee from retaliation for reporting the employer to the IRS (nor do many states protect the employee for reporting the employer to worker's comp, unemployment, etc). Whether the law should provide that protection is something over which I'm sure people would disagree. But if the employee wants to stick it to the employer, especially when he or she is leaving anyway, and make things better for his/her fellow employees going forward, there would certainly be good incentive to take that risk. If the employee really needs that job and is sure he or she can't get another job out there where he or she would be treated better, then that termination risk may be more than the employee is willing to take. On the other hand, the employer has to weigh how easy it would be to replace that worker going forward. If the person has skills that are difficult to replace or is simply a much better worker than the employer usually gets, the employer may decide to keep the employee despite being ticked off at being reported and having to pay the price of misclassification. Every situation is a bit different.

Most of the people that I have done SS-8s and 8919s for no longer work for the company, or are so sticker shocked by their tax bill that they are willing to go ahead with it. People who misclassify employees tend to not treat them very well either, so most of them are planning on leaving as well. Occasionally I will have someone who wants to keep the job therefore does not want to rock the boat, or are even friends with the employer and don't want to be responsible for getting them into trouble with the IRS.