Misclassified Employees & Taxes

Sometimes you take a job and it seems like it will be the best gig in the world.  The employer tells you that they will pay you weekly, that they won’t take taxes out and that they’ll even give you a 1099 at the end of the year so you can file your taxes.  But then you get that 1099, take it to your tax preparer and they tell you that you owe a bunch of money in taxes.  Wait?  How can this be?  Your preparer tells you that your 1099 causes you to be treated as an independent contractor or self-employed for tax purposes.  Self-employed?  That can’t be right.  I worked as an employee for that company for the entire year!  Thus, the problem at hand.

In this post on our sister site, we discuss how an employer is supposed to make the proper determination as well as what the tax differences are via being W2 versus 1099.  But when they improperly classify you as an independent contractor, it can cause you a whole lot of grief come tax time.  So how do you fix it?  Well, it’s really a two step process of trying to resolve the situation and filing the tax return.

Obtaining Proper Classification
The first thing you want to do is bring the matter to the attention of your employer.  Let them know that you don’t believe that the classification is correct and that you believe you were an employee.  This IRS site will give you a little assistance in making that determination.  If the employer is uncooperative or flat out refuses that you were an employee, you can ask the IRS to make the determination via filing form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  The employer will then need to respond to the IRS.  Once the IRS rules, they will send a determination to you and the employer.  If it is deemed that you were in fact an employee, the employer will then become liable for their share of the employment (payroll) taxes.  The unfortunate thing is that so will you.

Filing A Misclassified Employee Tax Return
Listed below are the steps on how to file your taxes if you are a misclassified employee and don’t have a W2.

  • File Form SS-8 so that you can begin the determination process.
  • Review Form 8919 Uncollected Social Security and Medicare Tax on Wages.
  • If you have a Form 1099-MISC from the employer, then you will have most of what you need to fill out columns A and B.  If you don’t have that form, then you will need to obtain the information from the employer (who may not want to give you their EIN if the two of you aren’t on good terms).
  • Tally up the amount of income that you received from the employer and enter it on line 6 of the form as well as line 7 of your Form 1040.
  • Use lines 7 through 12 to calculate your share of the Social Security and Medicare tax.  You will then enter this on line 58 of your Form 1040.

The downside to this is that you WILL have a liability with the IRS.  No income, Social Security or Medicare taxes were taken out.  But if you visit this page of our site, you can learn how we can help you resolve the issue with the IRS if you don’t want to tackle it on your own.

Top 3 Groups With IRS Debt

This form can be the death of you!

This form can be the death of you!

When it comes to running afoul of the IRS, certain generalities often come to mind regarding the types of people. Terms like deadbeat, scofflaw, tax evader, tax protester and the like tend to come to mind. But did you know that most of the people who generate IRS debt actually didn’t intend to? Furthermore, did you know that most of them (professionally) will fall into three categories? Let’s take a deeper look.

Independent Contractors. Working for yourself can be a dream. Whether it’s being a consultant or driving for Uber on the weekends, being your own boss can feel liberating. Oftentimes, when one is first approached with being a contractor, one of the things that will be “sold” to them is how no taxes will be taken out of your check. How can that be? We’ll that’s because most independent contractors are paid via Form 1099-MISC from a tax perspective. While earning a bigger check can sound wonderful at the onset, it’s a thing that come back to bite you come tax time.

Attorneys. If you’re an attorney who works in private practice for yourself, then you can suffer the same consequences as those who are independent contractors. This is because those who report compensation to attorney’s also tend to do so via Form 1099-MISC (see a trend here). If you look at the form, you will notice that box 14 is labeled “Gross proceeds paid to an attorney.”

Realtors. Realtors are another group that also tend to get into tax trouble with the IRS. Can you guess why? Correct; it’s because they receive their commissions via Form 1099-MISC!

The Problems Caused By Form 1099-MISC.
Being paid as a contractor is not an issue. They key is to know the difference in how an contractor deals with their taxes versus an employee. In this post on our sister site, one can learn some of the details. However, the summary version is that when you work as a contractor, YOU are the one who has to withhold AND remit the taxes to the IRS and state taxing authorities.  How do you do this? Via estimated tax payments.

Key Takeaways?

  • Those as independent contractors are at greater risk for running afoul of the IRS
  • If you will be paid via Form 1099-MISC, you need to consult with a tax professional
  • You will want to make sure that you are doing estimated tax payments (a.k.a. quarterlies)
  • If you don’t pay enough in estimated taxes, you can quickly generate a tax bill that you can’t satisfy.

Are you an independent contractor/freelancer who needs help staying in Uncle Sam’s good graces? Give us a call or shoot us an email. We’d be happy to tell you the steps you need to take and assist you if needed.

Filing Taxes Without A W-2 or 1099

W2 1099

So you finally get around to filing that tax return that was due eons ago.  You know, the one with the job that you worked at 5 years ago.  The one where you think you were paying on your student loan.  But wasn’t there also that job where you worked as a “consultant” and they just paid you money and didn’t take taxes out?  Oh yeah, and then that one company that closed up shop a week after you bailed!  But wait, where are all those documents showing how much you earned?

It’s not uncommon when you are dealing with an “old” tax return for you to have “misplaced” some of those wage documents (e.g. Form W-2 or Form 1099-MISC).  If you need to obtain them so that you can file your tax return, here are some recommendations.

Contact The Employer
The best place to start with trying to obtain your W-2 is with your employer.  The copy they issue you will be the same as the one they provided to the IRS.  Furthermore, it will have the state details (i.e. amount of state tax withheld).  This is important when compared to getting your W-2 via the next option.

Request A Copy From The IRS
Every tax form that you receive from someone is typically also filed with the IRS.  W-2s are no exception to the rule.  Thus, if you can’t get a copy from your employer, the next best option is to request them from the IRS.  To do this, you want to request what is known as a Wage and Income Transcript.  You can do so online and get instant access or you can request that they be faxed to you by calling 1-800-829-1040 and asking for the above transcript.  The main downfall of an IRS transcript is that it will NOT have the state income tax withheld.  Thus, if you are trying to file your Federal and State Income Tax Returns, you’ll probably want to go  the first route.

Use Your Last Paystub and Form 4852
Sometimes you are trying to file your return for the current year OR the W-2 isn’t available via transcript just yet. In these instances file Form 4852, Substitute for Form W-2 Wage and Tax Statement, in place of the W-2. Use your last paystub to estimate your income and withholding taxes as accurately as possible.  Just be aware that the IRS may delay processing your return while it verifies your information.

If you need help in obtaining your W-2s or a transcript, feel free to give us a call or shoot us an email.  Also feel free to check out this page to see the many other ways we can assist you.