Whether you should be a W-2 employee or 1099 independent contractor is becoming a very common question. In today's ever-changing economic environment, more and more people are participating in the "gig-economy" - an environment in which temporary working engagements are increasingly common, and businesses contract with service providers for short-term engagements. By some estimates, 40% of American workers will be independent contractors by 2020. This emerging business trend is being driven, in large part, by technology. With mobile phones in almost everyone's pocket, Wi-Fi hot-spots on every corner, and anyone with a laptop and an internet connection able to start and run a business, the era of the independent contractor is upon us. Unfortunately, many would-be employers are taking advantage of this trend by misclassifying as independent contractors workers who should be employees. This is a risky proposition as it exposes employers to significant tax and financial penalties, and deprives employees of many legal protections.
The easiest way to tell if you are an employee or an independent contractor is how you are paid. If you receive an IRS W-2 form at the end of the year, you are an employee. By contrast, a "1099 employee" is not technically an employee. Rather, this is short-hand for an independent contractor. You can also look on your pay stub to see whether Medicare, unemployment, workers' compensation, and federal, state and local taxes (if applicable) are taken out. If they are, you are an employee. If not, you are most likely classified as an independent contractor.
A true independent contractor provides goods or services to another business or individual under a contract. Usually the contract specifies the end result, but does not dictate the means and methods for getting the job done. In other words, an employer tells you what job needs to be done and when it is due, but when and how the job is accomplished is left up to the independent contractor. Generally, an independent contractor treats its employer more like a customer or client, will often have multiple clients, and is generally self-employed.
In the traditional employer-employee relationship, the employer pays half of the Social Security, Medicare, workers' compensation, and unemployment taxes. As an independent contractor, all of these taxes are borne by you.
Beyond the tax implications, employees are entitled to more legal protection than independent contractors. Employees are entitled to wage and hour protection, which means they entitled to overtime and mandated breaks. Additionally, employees are protected from retaliation and discrimination, and are entitled to medical insurance, pension plans, and family leave. Employees are eligible for unemployment and workers' compensation, which their employer pays into through taxes, and are entitled to collective bargaining protection (i.e. they are protected if they attempt to unionize).
Independent contractors receive none of these benefits or protections.
Employee misclassification not only harms the individual worker, it also undermines the economy. When an employee is misclassified as an independent contractor, the individual worker suffers. The worker is denied access to legal benefits and protections like a minimum wage, overtime, FMLA (Family Medical Leave Act) protection, unemployment protection, and workers' compensation insurance if they are injured at work.
The economy also suffers when employers misclassify employees. Independent contractors pay less in taxes, and pay less money into state unemployment and workers' compensation funds.
To combat worker misclassification, the Department of Labor started a worker misclassification initiative.
Even though they face steep penalties and fines, some employers misclassify workers as independent contractors to try to save money. However, the risk is not worth it. If an employer misclassifies its employees as independent contractors, the employer can face penalties, fines, and may owe its employees back taxes and be forced to pay unpaid overtime.
Service sector jobs are the most likely to be misclassified as independent contractors. People like delivery and taxi drivers, nurses, home health aides, and people working in the adult entertainment industry are most frequently misclassified as independent contractors when, in fact, they do not truly have control over the means and methods of performing their job. For an example, read about Blair and Davis, et al. vs. TransAm Trucking Inc. to learn how "Leased Drivers" are alleged to be misclassified as independent contractors.
Every case is different; however, if your employer misclassifies employees as independent contractors, your employer could be found in violation of state or federal laws regarding employee misclassification. Misclassifying an employee as an independent contractor could result in your employer owing back taxes, or having to pay a penalty for overtime violations. An employer could also be found liable for unemployment fraud or workers' compensation fraud. As an employee, you might be entitled to back wages for unpaid overtime, or recover for additional taxes you improperly paid as an independent contractor.
If you are fired after making a complaint that your employer misclassified you as an independent contractor, you may have a potential claim for retaliation.
If you think you have been misclassified as an independent contractor, you can start by trying to talk to your employer and asking them to re-evaluate and change your classification.
You can contact your state department of revenue and labor, or report your employer for unemployment insurance fraud, workers' compensation fraud, or tax fraud. Most states allow for anonymous reporting. You can also file IRS Form SS-8 with your tax return, asking the IRS to determine whether you are an employee or an independent contractor; however, the IRS often does not allow for anonymous reporting.
Another option is to contact an experienced employment protection attorney with questions about whether you were misclassified as an independent contractor.