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How to talk to a company as a prospective contractor vs. employee?

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

  • 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 ...show more

  • Answer:

    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.

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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.

Amy V

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.

SuzeY

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