Who pays what when an employer misclassified me and gave me a 1099 instead of w2?

Question

It has been determined by my state employment insurance department that my employer had me clasified as a independent contractor when in fact I should have been clasified as an employee. This was for the entire year of 2006. Of course no taxes were taken out of my check and I fully expected to have to pay them. I no longer work for him. He called me and told me that he was just notified of the decision today and that it will cause a delay in me getting the correct paper work to file my taxes. He said I should apply for an extention until they are able to figure this out. Could anybody tell me how this will work out?

fyi: I no longer work for this employer as of the end of 2006. I think this was a legitimate error and bad information given to him not any intentional dodging of his responsibilities.

Answer 1

You'll both pay.

He will have to pay in the unpaid payroll taxes.

You will probably have to pay him your share of the SS and Medicare taxes that he was supposed withhold from your pay but will be paying in with the unpaid payroll taxes, though that 7.65% sure beats the 15.3% you would have had to pay on Schedule SE.

To avoid penalties for underpayment of taxes, you will probably have to pay him an amount equivalent to the income tax that should have been withheld from your pay.

This isn't anything additional on you. just a difference in whom you will cut the check to. Your actual out-of-pocket will be less that way.

He still has to issue a W2 by 1/31/07 -- he does NOT get additional time to do that regardless of what he says. If he fails to get that to you by 2/28/07, contact the IRS. They will turn the heat up to get the W2 to you.

In the event that he doesn't get it to you in time, you should file a Form 4868 to extend the deadline to file BUT you must include a check for your estimated taxes with that. It would be a good idea to figure your tax based on the 1099 income and pay that amount with the Form 4868. The extension is for filing the return, not paying the tax.

Once you get your W2, file your return as usual. Then settle up the issues on the withholdings once you get your refund, which should be fairly significant.

Answer 2

When you receive a w-2, your employer generally deducts your federal income tax and social security deductions based on your W-4 deduction paperwork. Your employer also has to match the social security payment in your name, as well. When you receive a 1099, you are self-employed and responsible for all your own tax payments: federal and social security AND state, if applicable. Your tax payments are still due by April 15 regardless of filing an extension to submit your return. So, if you are not sure about how much you owe the IRS -- Make a guess-ta-mation and make a payment. Hopefully the payment will be enough to cover your tax liability and you will not be penalized for a late payment when you do file your tax return. If you need more information -- go to: www.irs.gov. Hope this helps.

Answer 3

Here is another option to consider.

There is a way to file as an employee without paying Social Security Tax, Medicare Tax, and federal withholding to your employer or waiting for the employer to straighten out his problem.

Include the income from the 1099MISC on LIne 7 of Form 1040 (wages, tips, other compensation). On the line for "other income" Line 21, enter the words "Form 1099MISC - see statement". Enter 0 on Line 21. Attach a statement to Form1040 explaining the payment on Line 7 from the 1099MISC.

If at the time you file your return, you do not want to pay your employee Social Security and Medicare Tax, the IRS will assess you that tax at a later date.

If you want to pay the IRS directly for your Social Security and Medicare tax with your tax return, use Form 4137 "Social Security and Medicare Tax on Unreported Tip Income." On this form, cross out the word "tips" and replace with the word "wages". Skip lines 2 and 4 which refer only to tips.

You will have to mail this return.

If the IRS has not found out about this employer, you may be asked to fill out form SS-8, for the IRS to determine employee status. This is not part of the tax return and is not mailed with the return. Here is form SS-8.

http://www.irs.gov/pub/irs-pdf/fss8.pdf

Answer 4

He is correct. There could be a delay which would force you to file for an extension, based on the misclassification.

I would recommend that you contact the local IRS office (call or in person) for an "official" position and since they will not ask for personal information, you need not worry about them "flagging" your return.

You will need to complete Form 4868 (Extension of time to file) prior to April 15th to get an extension of up to six (6) months. However, during that period, interest will accrue on the amount of tax not paid, beginning April 16th.

Answer 5

If he actually reported your pay on a 1099, you'll probably need to file a Schedule C and pay the 'self employment tax' - actually both your share and the employer's contribution to Social Security, which will come to 15% of your 'profits.' On the plus side, many of your expenses are now deductible, but you'll need to be able to document them. It would be best to consult a tax attorney for better guidance; the state may want to enforce your employee status, which in theory costs you less but the accounting (which requires cooperation from the employer) is *much* messier.

It sounds to me like your employer is trying to pull a fast one to get out of paying his share of the Social Security tax; intentionally mis-classifying people also allows them to avoid paying your share of workman's comp taxes, health insurance and other pesky expenses. This cheats both you and the government. It seems very unlikely to me that he 'just found out' about this. In other words, there's probably some funny business going on and it's probably time to find another employer.