Are you misclassified as an independent contractor? If so, it’s important to find out why. Most people would say yes if they are classified as a 1099 employee and not a W2.
Independent contractors usually receive a 1099 form in the mail at the end of the year instead of being paid via payroll. This is because companies classify them as self-employed and therefore exempt from paying taxes on their behalf.
The problem with this classification is that it leaves you open to all sorts of legal problems. For instance, not receiving overtime pay, being denied unemployment benefits, and being denied workers compensation coverage
This article will cover everything you need to know about being misclassified as an independent contractor.
So keep reading to ensure that you don’t fall victim to this type of issue.
Who Is an Independent Contractor?
Independent contractors are self-employed workers who provide their services to other companies. They typically receive a form at the end of the year that looks like this:
The IRS has obvious guidelines for what constitutes an independent contractor. There are two main factors they look at when making this determination.
The first factor is behavioral control. This means how much supervision you have over your work process on assignment with another company.
If you don’t answer to anyone else but yourself or if someone can require that certain tasks be completed instead of dictating every step in detail, then it’s more likely than not that you’re misclassified as an independent contractor in California.
The second consideration is financial independence. This is because many companies don’t want to withhold social security and payroll taxes for someone else. Specifically, if they’re not responsible for during the year.
If you are financially independent in your line of work, then it’s more likely than not that you’ve been misclassified as an independent contractor.
Unfortunately, there are penalties for misclassifying employees as independent contractors California. More on this later in the article.
The IRS provides a 20-point checklist (PDF) on what constitutes an employee or self-employed worker. Still, the two main factors mentioned above seem to come into play most often when identifying classified incorrectly.
The twenty points refer mainly to how much control over decision-making and at what level. It includes whether there is an agreement detailing the terms of employment and some other considerations. One can find all this information here:
Even if you are an independent contractor, it doesn’t mean that your paycheck should go into the mail without a second thought. It’s important to make sure that you’re doing everything correctly on your end so as not to be audited or get in trouble with the IRS later down the line.
This includes filing all of your paperwork appropriately and keeping accurate records for whatever work you do. This is true during a year-long span making sure no one can argue that they’ve done more than 50% of any project or task.
Most importantly, don’t ever try to class yourself as anything other than what is printed on your W-99. This is done at the end of every quarter. This is because years and sometimes decades’ worth of fines could result from having been classified incorrectly.
Who Can Be Misclassified as an Independent Contractor?
It’s not just independent contractors that can be misclassified as employees. Business owners who think they’re exempt and have a couple of part-time workers for their own company are also subject to this oversight.
If you’ve been working in your business for more than two years, then it’s likely that the IRS will classify you as an employee. This is true if there is no formal agreement stating otherwise.
That means that, though technically self-employed, the tax rate would still apply at the full individual income level. This is until Social Security starts kicking in around $120k/year.
Furthermore, if you’re a self-employed worker and your company or business makes more than $150,000/year in gross income, then it’s likely that the IRS will classify you as an individual who should be paying state taxes on their own.
For many people, this means they’ll have to start filing quarterly paperwork with their local government entity. This is something few are aware of until after the fact.
So what if I am misclassified as an independent contractor?
A lot can go wrong when misclassified! Not only do independent contractors miss out on benefits such as unemployment compensation. There could also be huge tax implications for businesses where owners think they’ve been exempt all these years.
It’s always important to ensure everything is done according to the law. Please don’t take chances if you fall into any of these situations without consulting a lawyer first.
What to Do if You Have Been Misclassified?
If you have been misclassified and are either an independent contractor or a business owner who has never filed for self-employment, then the best course of action is to consult with a lawyer.
These cases can be complex in nature. Thus, you must get someone on your side early before any consequences arising from not taking necessary precautions now.
The first thing you want to do is make sure you pay the appropriate taxes for your income to be classified properly.
It may also mean that you need to file quarterly reports with a government entity or get benefits such as unemployment compensation. This depends on where things stand and how long it has gone unchecked.
It’s never too late! If there are consequences now because of misclassified years ago, one can still fix them. This is done by working closely with an attorney specializing in these cases.
What Happens if You Don’t Find an Attorney?
If you don’t find an attorney to help with your case, then the IRS can come back and audit you for up to 20 years of misclassified income.
That means that they’ll demand information on each year’s worth of earnings along with tax payments, which could lead to literally thousands in unpaid taxes and penalties because it was never brought into compliance by a professional who handles these cases regularly.
The best course is always prevention! If there are any questions or concerns about whether or not you’re properly classified as either an independent contractor or self-employed business owner, please contact us immediately to get this sorted out before anything else goes wrong down the line.
You might also lose overtime pay, unemployment benefits, and the ability to contribute to a retirement account, for example if an employer retaliates.
These are severe problems that can ruin an otherwise great company or business if not handled properly.
It’s important to work with someone experienced in this field and knows the ins and outs of how these cases are handled. Specifically by independent contractors and employers alike. This is so that you know exactly what should happen from here on out.
There may be consequences for those who have already been misclassified for a long time. This is because it never came into compliance before.
However, they’re still fixable without major legal fees. This is true, thanks to helping from attorneys who specialize in handling these types of cases regularly.
If your employer has forced you to sign an agreement stating that you are an “independent contractor,” read through all terms carefully. Make sure you did everything according to the law.
How to Find an Appropriate Attorney
To find an appropriate attorney, you must first know what type of misclassification you have been experiencing.
Are you an independent contractor? Are you a business owner who has never filed for self-employment before? Identifying the issue will help narrow down your search to find someone with experience in that area or at least those types of cases.
The lawyer should be able to provide counsel on how best to handle things.
For instance, formal agreement and contract regarding work within their company. Hence, there’s no question regarding whether they are an employee, employer, or something else entirely.
They can also address major tax implications if any arise. This is because it is now impossible to file quarterly reports with government entities without them knowing about it. This depends on where exactly these mistakes occurred in the past.
They will also guide employment compensation and anything else that may have gone unnoticed in the past. It’s never too late for filing paperwork.
If you are unsure about what should be done, then it is absolutely worth seeking out a lawyer who specializes in this area of law. Do this to help yourself with these matters now before they become more complicated than necessary!
Legal Assistance When Needed
This is an important issue and should be handled by someone who understands how to handle cases. This must be done without uprooting everything. This is because they have experience with both sides, employers, and employees alike.
It’s not always easy but if you work with somebody specializing in these types of cases, then at least know what went wrong. Do this to avoid them happening again moving forward.