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Reclassifying an Independent Contractor to an Employee

If you're an unhappy independent contractor, should you try to get reclassified as an employee? How would you go about such at thing??

The IRS has very specific rules about who is an independent contractor and who is an employee. You can find out more about there rules in IRS Publication 1779, Independent Contractor or Employee and Publication 15A, Employer's Supplemental Tax Guide.

Basically, an independent contractor can be told what to do, but not how to do it. Also, an independent contractor can't quit or be fired until the job s/he is hired for is complete. If an independent contractor is working side by side with employees and treated as an employee s/he is usually considered to an employee from the IRS's perspective. A contract with specific language indicating you are an independent contractor may give some cover to the hiring firm regarding your relationship.

If a worker is reclassified from independent contractor to employee, the hiring firm must pay all payroll taxes that should have been paid if the payments to the independent contractor had been considered salary. In addition, it must pay the employee's share of the FICA tax and any federal tax withholdings that would have been withheld.

If that isn't enough, there will be some pretty painful penalties & interest to go with that. And the state labor department will enforce similar rules, penalties & interest for state taxes and withholdings not paid.

To get reclassified, file Form SS-8 with the IRS and they will review the facts of your situation and make a determination as to if you were an employee or not. The IRS will be requesting additional information from you and the client. Be prepared to have your tax return looked at very carefully. If the IRS does make the determination that you were an employee you will have to file amended tax returns for the years in question.

There's no fee for filing Form SS-8, but the IRS will only look at actual situations, no hypothetical scenarios.

There are special instructions for filing your amended return included on the SS-8 instructions. Be sure to follow those to get a protective claim if you're going back in time far enough that the three-year statuate of limitations on refunds might expire.

You may also be concerned about any back benefits you would have recieved if you had been an employee. Check your contract to see if there is any language regarding that. If not, I would suggest you see an employment law attorney to find out the best way to get back benefits. But be prepared to have to sue to get them.

In the end though, bringing the IRS into any situation is rarely a good way to resolve anything. You will end up getting scrutinized just as much as the hiring firm. Most people don't really want the IRS snooping around in their lives. And spending a lot of time and money on legal fees and court cases doesn't sound that appealing either.

The best advice to an unhappy contractor is find away to live with the contract you have or find a way to gracefully exit the situation and move on.

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Afterthought

This was an interesting article, and I realize it's from 2006 - however - I believe that most people would very much strongly disagree with your statement here:

"The best advice to an unhappy contractor is find away to live with the contract you have or find a way to gracefully exit the situation and move on."

This is an absolute horrible way to resolve a potential problem of employment misclassification - and you would be esentially saying that it's OK for an employer to abuse the relationship with their workers - simply to skimp on paying their legally obligated portion of the taxes due by the individual.

Horrible solution

I agree that this is not optimal. It certainly is not ok for employers to abuse the relationship.

But the reality is that if you raise a stink, it will open up the worker's own tax records and could effectively blackball him/her against future contracts.

I suppose the best advice is to be informed going into a interview so you can identify the situation & raise the employee/independent contractor issue before you're hired.

Thanks for the comments.
L:)

Linda, You state that

Linda,

You state that independent contractors can't quit or be fired until the job is complete. That's not true. Independent contractor arrangements usually have language in them defining early termination of the agreement by either side.

Defining Independent Contractors

Hi Lena,

Yes, if you have a contract that states that it's helpful. But the IRS considers this in the factors when it considers when determining whether a worker is an independent contractor or an employee. That's another reason why a contract is so important when hiring, or being hired has, an independent contract.

L:)

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