Are you an employee or a contractor?
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The North Carolina House Judiciary Committee is taking on employers who try to shirk paying taxes for employees by misclassifying them as 1099 contractors. The News & Observer conducted an investigation last year and found rampant evidence of employers cheating the state out of unemployment taxes and cheating workers by forcing them to pay employment taxes that they would not otherwise have to pay. If you've been misclassified, you could find yourself in financial hot water. Here's what you need to know.
Why employment classification matters
When you work as a W2 employee for a company, you receive your paycheck with federal and state income taxes withheld from your pay. In addition, you pay a share of FICA and Medicare and so does your employer – these are each roughly 7.5%. Your employer also pays state unemployment tax into the state fund. And if you work full time, the employer likely has to offer you benefits.
However, if you are misclassified as a 1099 contractor, no state or federal taxes are withheld and you have to be sure to set this money aside yourself. Also, the 7.5% of FICA and Medicare that your employer should pay now falls on you. You will be subject to a more than 15% self-employment tax on your annual federal tax return to make up for this. You will also not accrue sick or vacation days, or receive any benefits. In addition, if you lose your job, you are not eligible for unemployment compensation and if you are injured, will not able to make a workers comp claim.
Are you a contractor or an employee?
In some cases, you may genuinely be a contractor, should not have taxes withheld, and should properly receive a Form 1099. But in many cases, it's an employer being sketchy and trying to skimp on the costs associated with employees and pushing for 1099 status.
Classifying you as a contractor is only appropriate if you:
- Are allowed to set your own schedule and hours
- Determine how your work will be accomplished
- Can turn down offers of assignments and choose which tasks to accept
- Supply your own tools or technology (wrenches, laptop, etc.)
- Work for more than one client
In contrast, employees are those that:
- Have a set schedule or must work certain assigned hours
- Must work in a manner dictated by the company
- Must work at a certain location
- Must complete all assignments given to
- Are given tools and materials to complete the work
- Work for just one client/employer
It is not for you or your employer to decide which you are – an employee or contractor. The nature of your work arrangement and Federal tax laws determine your employment classification and tax status.
How and why employers misclassify
Some employers may offer 1099 status as an option you can elect, and may try to tell you it's a beneficial arrangement because you will have more take-home pay. In fact, it's ultimately less pay by the time you pay the additional self-employment tax. Some employers try to strong-arm workers into accepting this arrangement by telling them it's customary, the only option, or misleading you about 1099 versus W2 classification.
As to why employers do this, it's all about saving money, but what it does is leave employees without protection. If you are injured on the job, you are not eligible for workers compensation as a 1099 contractor. And there's no safety net of unemployment compensation if you are laid off or lose your job as an independent contractor. Employers cheat the state out of millions of dollars in lost taxes when they engage in this practice and needlessly put workers at risk of financial hardship.
What North Carolina House Bill 482 proposes
A new bill proposed in the state legislature would hold employers' feet to the fire and introduce new accountability standards. In addition, the law would:
- Impose a $1,000 fine on employers who violate the classification law
- Bar offending employers from obtaining state contracts for five years
- Rescind state licenses and permits from employers who are repeat offenders
There are several versions of the bill in the works and one would take an even harsher approach and shut down work sites for employers who are cheating worker classification laws. The bill has been the subject of intense debate and negotiation between the state judiciary and the North Carolina chamber and it's likely the stop work provision will not be part of the final legislation.
What to do if you were misclassified
The best place to start is with your employer. Tell them you believe you were misclassified and would like it corrected. If the employer argues with you, you may have to turn to the North Carolina Department of Labor (www.nclabor.com) or the Federal Department of Labor (www.dol.gov) for resolution. You should not allow yourself to be bullied into accepting a misclassification. With the increased scrutiny on employers who try to cheat the classification system, you are helping yourself and your fellow workers by reporting your employer to the state or federal DOL. With the help of the DOL, you should be able to get some of your tax issues corrected such as having the employer retroactively pay FICA and Medicare so it's not an additional burden on your income taxes.
Contact the Law Offices of John T. Orcutt today for a free consultation with a North Carolina bankruptcy expert in Greensboro, Raleigh, Fayetteville, Garner, Wilson, or Durham. Call +1-919-646-2654 to discuss your debt relief options and find out how to get the financial fresh start you deserve.