We are back with another week covering Independent Contractor’s vs. W-2 Employees. This week’s focus is on taxes. We do not claim to be experts on Tax Laws by any means, but here are some things to be aware of.
If you have been classified as an Independent Contractor, you incur pretty dramatic tax costs and if you were misclassified that means your employer should now be on the hook for those too. The reason you incur such a high tax cost is that as a W2 employee your Gross pay is reduced to pay for Federal Tax, State Tax, Medicaid, and Medicare. After these reductions take place you then get your “Net” or “Take Home” pay.
What many employees are not aware of is as a W2 employee it is the responsibility of the employer to pay half of these costs as well. That’s right, those line item costs on your paycheck are only half of the actual cost of those taxes! As a 1099 employee, the law looks at you as your own “sole proprietor,” and will expect you to pay the entire cost of the taxes, both your half and your employer’s half.
This “tax overcharge” that occurs because you were wrongly coded as a 1099 employee is not something a private right of action will fix for you either. In fact, it is through corrective filings with the IRS that will ultimately provide relief. Specifically, there are two forms that serve as the method of recovery and they are: Forms 8919 and Form SS-8.
Form SS-8 is essentially a way to report to the IRS that you think you have been misclassified and will put the employer on the IRS’s radar for a potential audit. Form 8919 allows you to file taxes as a W-2 Employee even if your employer is trying to code you as a 1099 employee. This Form 8919 is most useful to file when you (or more likely your attorney) has begun an action against your employer, or right before the action is started, or if the IRS has determined that you should be considered a W-2 employee. Do not use Form 4137. Prior to the introduction of Form 8919, employees in this predicament would have used Form 4137, however, this form has since been limited to only “tipped” employees.