1099’s and W-2’s: If Your Boss Broke the Law, it Might Make Your Taxes Higher

Ceilidh Gao

Blog April 13, 2018

As Tax Day approaches, tens of millions of workers have received “independent contractor” tax forms, or 1099’s – and their ranks are growing. Many of these workers who are filing as independent contractors for the first time may get a nasty surprise come April 17: the tax burden may come as a huge shock.

That’s why it’s important for workers to know that being treated as an independent contractor has tax consequences – and that bosses are breaking the law when they treat workers who are really “employees” as “independent contractors.”

What is an independent contractor?

If a company treats you as an independent contractor, in theory you are operating as an independent business. Instead of being an employee of the company, you are employed by your own business, or “self-employed.” You’ve probably received a 1099 tax form, instead of a W-2.

Many people are true independent contractors – for example, independent electricians or accountants who have many clients with whom they have business relationships. Today, many workers legally should be treated as employees, but companies treat them as independent contractors instead. This is sometimes called “payroll fraud” or “independent contractor misclassification.” Under the law, these workers should be employees. They often work on an ongoing basis for one company, which controls how they do their work.

For example, a pizza shop might rightfully hire an electrician as an independent contractor. That person operates an independent business, has his or her own expertise, and comes in to do a contained project, like rewire a kitchen. The pizza shop owner doesn’t tell the electrician how to do the work; the electrician gets paid if they get job done and decides how to do it. In contrast, the cooks and delivery people at the pizza shop contribute to the main business of the pizza shop – making and selling pizza! – and the boss tells them what to do and assigns them to shifts. If the boss treats these workers as independent contractors and not employees, he is likely breaking the law.

Why would they treat me as an independent contractor when I’m really an employee?

The short answer won’t surprise you: money. A company saves as much as 30 percent on payroll costs when it treats a worker as an independent contractor as opposed to an employee. When a company has an employee, the company pays taxes – for example, contributions to Social Security, Medicare, unemployment insurance, and workers compensation. They also might owe you additional employee benefits, like health insurance, overtime, retirement benefits, or equipment.

When they treat you as an independent contractor, the company shifts the costs to you. Not only do you lose out on the benefits of being an employee, but your taxes go up!

Wow, this sounds like a scam. Does this happen a lot?

“Payroll fraud” or “independent contractor misclassification” is surprisingly common. It is particularly rampant in the janitorial, home care, trucking, and delivery sectors. Workers have filed major lawsuits against companies alleging that they should be treated as employees. Recent cases in the news include lawsuits by Uber drivers, port truck drivers, janitors, and home cleaners. These workers are often owed thousands of dollars in overtime pay and other wages and benefits.

What should I do if I think I’m really an employee and not an independent contractor?

It’s a good idea to talk to a professional. Many laws – like minimum wage laws, unemployment insurance, and workers’ compensation – have broad definitions of who is an employee, and you might be an employee even if your employer calls you a contractor. There can be important consequences for you. For example, if you are injured on the job, you might qualify for workers’ compensation as an employee, and it is particularly important to file a claim or talk to a lawyer. Every situation is different, and it’s a good idea to talk to a professional.

If your concern is with your tax burden, talk to a tax professional. The IRS also has additional information online. If you are concerned that you aren’t receiving the proper employee protections – for example, you are making less than minimum wage or overtime, or being discriminated against – you might want to contact a private employment lawyer, like those available through private or state bar referral services, or a government agency, like the Equal Employment Opportunity Commission or the Department of Labor. Many states offer greater protections than the federal law, so it’s a good idea to consult your state agencies, state attorney general’s office, or private employment lawyers in your state.

Many bosses will misclassify workers in order to discourage them from filing claims. Workers are often under the false impression that they don’t even qualify for certain protections, so there’s no reason to seek out a lawyer or file a claim. In reality, this kind of payroll fraud is common, and workers who deserve employee protections can fight to get them back.