IRS Determining "contractor vs employee"? SS-8 form?

Question

I worked for a company part-time for 2 years while I was a student. The first year I earned $1,000 the second year(2006) I earned $15,000. The company gave me 1099-MISC instead of W-2. I never signed a contract or considered myself a self employeed contractor. I always thought I was an employee for the company. There was no written agreentment or contract when I started to work. I was paid hourly and was offered a health care plan but turned down because they wanted to lower my hourly rate if I accepted the health care plan.

I didn't file tax return last year because the amount I earned ($1,000) was not enough to file. I found out this year that individual contractors need to file tax return if the income was above $600. Will there be a penalty for me?

I'm trying to submit SS-8 form and have my status changed to employee. How long does the whole process take? How should I file my tax return this year? Should I file an extension and wait for the IRS SS-8 decision

There is a co-worker who received a W-2 last year but getting 1099-MISC this year because she switched from full-time to part-time. Her work did not change at all. I did some research and it seems that full-time or part-time doesn't matter for employee status. Isn't the company breaking the law?

Answer 1

First off, you were misinformed about last year's return. The SE income ceiling is $400, not $600. You must file a 2005 return with Schedule C or C-EZ to account for the income and business expenses. You file Schedule SE to calculate the SE tax. The rate is 15.3% of the net profit from the business activity. Yes, you will have penalties and interest for late filing of the return and late payment of the tax.

You should also file your 2006 return ASAP, using Schedule C or C-EZ and Schedule SE. I'm assuming you did not make the required quarterly estimated tax payments on Form 1040ES so you need to get your return in quickly and pay the taxes to stop the clock on the penalties and interest for underpayment of tax throughout the year.

If the SS-8 determination goes in your favor, you can file amended returns for both 2005 and 2006 using the Forms W2 that your employer will give you. You should get back any penalties and interest for 2005, along with the SE tax you paid. You'll get back the SE tax for 2006 but the employer will probably demand that you pay over the employee's share (7.65%) that they should have withheld from your pay. You might be able to negotiate that -- but you really should pay it.

If you file an extension, that's only an extension of time to file a return, NOT an extension of time to pay the tax. If you do, make sure you send a payment with the extension application for the worst-case scenario -- full SE tax, income tax, plus the penalties and interest for underpayment of estimated taxes. If you don't, you'll be facing even more penalties and interest for late payment of taxes. You can then use that payment as a credit against your true tax liability when you file, whichever way the SS-8 case goes.

Answer 2

Wow! This is a long question. It sounds like the company is violating the law by trying to classify you as an employee. Contractors are "full" or "part time". As a contractor, you can determine your own hours. Also, the red flag here is the fact that the company offered you health benefits. Subcontractors aren't eligible for any company benefits-health insurance, workers comp, vacation, sick days, etc.

I could go on and on here, but I'll try to get to the point. You'll be subject to penalties and interest for not filing your income tax for 2005. You'll need to file Form 1040 for 2005. I'm guessing that you probably don't have any expenses to offset against this income because it sounds like you were basically treated like an employee. So, on the miscellaneous income line, identify the income as subject to self-employment. You'll pay 15.3% self employment tax on that income, plus penalties and interest. The sooner you get it done, the better off you'll be: the interest and penalty meter runs daily, not monthly.

As far as the SS-8, I don't see how that's going to help you for 2006. If no taxes have been taken out of the $15,000, you're going to owe a bundle. Get the return filed, and I would recommend that you talk to a CPA firm about how to go forward with this.

Answer 3

If you are recognized as an employee by your company, your company will set that up for you with the IRS. You fill out a W-4 for yourself and claim your exemptions for withholding, and your employer withholds from your paycheck your federal income tax based on standard withholding amounts and your share of OASDI (Social Security & Medicare at 7.65% of your pay).

This is the primary difference between a contractor and an employee: Withholding. The employer withholds taxes from your check and pays them on your behalf. As a contractor, the company does not withhold anything, and you are responsible for paying your own federal and state income taxes AND your full OASDI tax of 15.3% of your pay over $600.

Also, as a contractor, you need to reduce the money your customer (and that is essentially what your employer becomes) paid you and you reduce it by expenses incurred by you on the job that were not reimbursed or paid by your company. In essence, you work for yourself and pay your own taxes.

In the first year, you would not be liable for Federal Income Tax because you did not earn enough, but you would have to pay OASDI on SELF-EMPLOYMENT EARNINGS at 15.3% of net earnings. You want to keep receipts of expenses in this case.

For the second year, you probably owe Federal Income Tax in addition to OASDI.

The difference between employee and contractor is that when you are an employee, your employer withholds your federal income tax for you and pays 1/2 of your OASDI.

As a contractor, you pay all taxes due.

Answer 4

The IRS uses what's commonly known as the 20 factor test. If you are eligible for health care and they are going to make a deduction from the paycheck or reduce your rate of pay, you would not be considered a 1099. The employer could be risking fines and penalties themselves for mis-classifying their employees, both of you should consult a tax professional.

Answer 5

Ss8 Form