Taxation without representation?

March 18, 2009 8:01 AM

I suspect my former company is guilty of tax evasion after paying me like a freelancer instead of a full-time employee, unless I'm operating under a serious misconception of tax rights. I quit under duress, but now I'm filing taxes and I'd like to report their behavior if it has indeed been inappropriate. Please tell me whether or not I'm right to do so, and if so, how I should report them to the IRS with very little concrete evidence other than hearsay and my own 1099 form.

I was hired as an assistant editor at a small company with the verbal promise that after a trial period, I would be put on payroll and given benefits. This never happened, and the company eventually fired the rest of the editorial staff and placed me in charge of everything. I was always paid like a freelancer, despite working 50 hours a week without any of the freedom of freelancing and all the expectations of a typical employee. None of my taxes were ever deducted. Naturally, this means that I am officially obligated to pay my full payroll tax, something like 12.4% of my income, rather than the 6.2% I'd pay if I were acknowledged as a full-time employee.

The company has also refused to take out the taxes of less freelance-y folks, like the office assistant. They laid-off my co-worker and then covertly re-hired him, now paying him under the table in cash. The CEO suggested that the guy collect unemployment on top of his weekly salary.

I'm not a tax lawyery expert, but this is all pretty illegal, right? My problem is that I quit abruptly under the pressure of the low pay, lack of insurance, and other mundane degradations that the company unleashed on its staff, so I never gathered evidence to support my claims. If I call the IRS and just tell them that I suspect this company is committing tax evasion, will I have a case against them? Do I have a shot at recovering half my payroll tax, or did I screw myself over by quitting in a huge huff without stealthily building my case?

I live and work in New York City. Thanks in advance for any insight.

posted by zoomorphic to work & money (21 answers total)

You might either want to change your profile or considering asking this to be anonymous.
posted by jerseygirl at 8:20 AM on March 18, 2009

In this relatively small company they'll probably know it was me who reported them, if that's what I should do. And if I don't come clean now, they might suspect their current staff and fire accordingly. I'm also not ashamed of calling out moneymen for tirelessly exploiting their staff. This isn't a line of business I'll ever pursue again, so the any bridges burned aren't terribly important. I just need to know if this is illegal and what I should have in advance when calling the IRS.
posted by zoomorphic at 8:30 AM on March 18, 2009 [1 favorite]

IANAL, but you must've known all along that they weren't withholding taxes. What they're doing is almost certainly illegal, but they were doing it to you with your consent. Given that, your personal case for reparation seems like a long shot.
posted by jon1270 at 8:31 AM on March 18, 2009

If you feel that you were inappropriately paid as a contractor when you were actually an employee, the IRS thinks the burden is on the employer to figure that out.

You should file the Form SS-8 linked on the page I linked above. The IRS may well assess your former employer, which could potentially result in your being refunded whatever self-employment tax you paid.

IANAL, but I have worked for an employer that was hit with a big assessment + fines for misclassifying employees as contractors.
posted by Sidhedevil at 8:39 AM on March 18, 2009

The IRS has fairly specific criterion for defining whether or not you are an employee or a contractor, but essentially "anyone who performs services for an exempt organization is the organization’s employee if the organization can control what will be done and how it will be done" (quote from IRS website). All of the criterion are here, although this is specifically for charities (can't find the one for fp biz, but I don't recall it being substantially different).

Be warned that there are huge fudge factors and both sides tend to treat this issue quite elastically.

Just to make things more confusing, your state Dept of Revenue/DES will have different tests to determine whether the business must contribute to unemployment. However, if you find out that your business was counting you towards their unemployment obligation, that's a pretty clear indication that you were an employee and not a contractor. If they were NOT including you, they can use their own delinquency in that regard as proof that your were not an employee (tautological, but there you have it).

IANAL or an accountant (I was, however, a business owner.)
posted by nax at 8:47 AM on March 18, 2009

Here are two relevant forms form the IRS for employers Publication 15 and Publication 15a.

The common-law classification for and employer-employee relationship is such: "Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed"

It doesn't matter what the employer calls it.

Use the link that Sidhedevil posted to contact the IRS. New York State has a 24 hour telephone number you can call to lodge your complaint as well.
posted by Stynxno at 8:51 AM on March 18, 2009

See, in your case, this isn't tax evasion. Ultimately, the IRS generally doesn't care who pays your payroll taxes as long as they get their 12-ish% from someone. Paying you like a freelancer while treating you like an employee is bad labor practice but doesn't actually implicate any tax concerns I can think of off the top of my head. From where I'm sitting, your odds of getting reimbursed for your taxes look pretty low, but you're going to want to talk to a New York employment attorney about that.

Paying someone in cash under the table is illegal, because in that case, the government isn't getting its taxes, as the income is unreported. You can report suspected tax evasion to the IRS by filling out a form; details are available on their website. You'll also probably want to contact the New York City Department of Finance, who also has a page for dealing with this sort of thing. The New York State Department of Taxation and Finance would probably like to hear about it too.

Whether or not either of those will actually produce a result is beyond my ability to predict.
posted by valkyryn at 8:53 AM on March 18, 2009

If you report it be sure to consider how the IRS might view your participation. For example, if you didn't make the quarterly estimated tax payments you're supposed to make as a 1099er, you might not look entirely great to the IRS, though if I remember correctly they tend to forgive people who don't make the payments in their first year of 1099 work.
posted by PatoPata at 8:54 AM on March 18, 2009

If you report it be sure to consider how the IRS might view your participation.

In my experience, the onus in the IRS's eyes really is on the employer who improperly classified the employee, not on the employee who was misclassified.
posted by Sidhedevil at 9:15 AM on March 18, 2009

That's news about quarterly tax payments. Twice I asked our company accountant about forms for paying my quarterly taxes as a 1099 employee and he told me that I could just pay in bulk at the end of the fiscal year.
posted by zoomorphic at 9:30 AM on March 18, 2009

Valkyryn is incorrect. The IRS cares very much cares about employers treating people like Full Time Employees yet giving them a 1099. 1099's don't pay takes such as Social Security.
posted by sideshow at 9:31 AM on March 18, 2009

zoomorphic: I was always paid like a freelancer, despite working 50 hours a week without any of the freedom of freelancing and all the expectations of a typical employee. None of my taxes were ever deducted. Naturally, this means that I am officially obligated to pay my full payroll tax, something like 12.4% of my income, rather than the 6.2% I'd pay if I were acknowledged as a full-time employee.

Others have made this point, but since I've had to deal with it in the past (my wife's former employer was this way) let me make it as clear as possible:

(1) Who decides if you are a freelancer? Answer: not you, certainly not your employer; ONLY THE IRS has the authority to decide. Therefore, if you worked 50 hours a week without any of the freedoms of a freelancer, you were an employee in the eyes of the law.

(2) Who is required to make sure taxes are withdrawn from your paychecks? Not you, but your employer. What's more, as you probably know, they are required to pay some taxes, as well, if you are an employee; that's why many companies do this tax-evasive move of keeping people on as freelancers. It is illegal. Sometimes companies have the interesting idea that it is up to them whether or not someone is a freelancer; it is not.

PatoPata: If you report it be sure to consider how the IRS might view your participation. For example, if you didn't make the quarterly estimated tax payments you're supposed to make as a 1099er, you might not look entirely great to the IRS, though if I remember correctly they tend to forgive people who don't make the payments in their first year of 1099 work.

As a 1099er myself, I can tell you this: you are not required to make quarterly payments as a 1099er; you're only encouraged to do so for convenience. The only thing that matters is that all of your taxes are in at the end of the year; so the poster is not in trouble for this at all.

What you should do, zoomorphic, is this:

(1) Fill out Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This asks the IRS to determine whether you are an employee or an independant contractor; it's likely you're the former. Be sure to read through pages 4 and 5, the instructions, which will explain to you what'll happen with your form. It seems that your former employer will be sent a form to fill in as well, and the IRS will investigate as much as it needs to to make a determination. They won't really care if your former employer protests that "we always agreed that he was a freelancer!"

(2) Fill out a 1040x income tax return. Follow the instructions you were given on the SS-8:

On the Form 1040X you file, do not complete lines 1 through 24 on the form. Write “Protective Claim” at the top of the form, sign and date it. In addition, you should enter the following statement in Part II, Explanation of Changes: “Filed Form SS-8 with the Internal Revenue Service Office in (Holtsville, NY; Newport, VT; or Washington, DC; as
appropriate). By filing this protective claim, I reserve the right to file a claim for any refund that may be due after a determination of my employment tax status has been completed.”

... and otherwise fill in the form as though you were an employee - since you really were.

That covers what you need to do to file your taxes correctly. You may want to call them (1-800-829-1040) and discuss this, and also ask what options you have for formally reporting your company's wrongdoing, as well.
posted by koeselitz at 9:33 AM on March 18, 2009 [4 favorites]

valkyryn: Paying you like a freelancer while treating you like an employee is bad labor practice but doesn't actually implicate any tax concerns I can think of off the top of my head.

You have clearly never had any employees. The cost of hiring someone formally as an employee is astronomical compared with the cost of keeping them on as a freelancer, and most of that is taxes - for Social Security, for example, and many other things. It is not the same proportion either way; it's not 12% from a 1099er, 6% each employer/employee. That's not how it works; the IRS gets more money if a person is an employee, and that more money is paid by the employer.

I've had knock-down drag-out fights with employers about whether they were going to call me an employee or not. And I can tell you that the IRS will listen very closely if you call them and tell them that you're an employee. That's why they have a specific form for the purpose.
posted by koeselitz at 9:37 AM on March 18, 2009

Sidhedevil: In my experience, the onus in the IRS's eyes really is on the employer who improperly classified the employee, not on the employee who was misclassified.

True. See this previously-linked page at the IRS for employers:

It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. [emphasis mine]
posted by koeselitz at 9:42 AM on March 18, 2009

I think Koeselitz may have overstepped with this: you are not required to make quarterly payments as a 1099er; you're only encouraged to do so for convenience.

From IRS.gov:

You must pay estimated tax for 2009 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of;
* 90% of the tax to be shown on your 2009 tax return, or
* 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.

posted by jon1270 at 9:44 AM on March 18, 2009

Yes, jon1270 is correct. I was getting tripped up because I'm a new 1099er, and as such I don't have to make those payments, since I didn't have any tax liability in 2008:

You do not have to pay estimated tax for 2009 if you meet all three of the following conditions.
You have no tax liability for 2008
You were a US citizen or resident for the whole year
Your 2008 tax year covered a 12 month period
posted by koeselitz at 9:48 AM on March 18, 2009

"You are not required to make quarterly payments as a 1099er; you're only encouraged to do so for convenience." As others have pointed out, this is not correct. That's why there's a penalty for not paying quarterly taxes correctly. I've paid that penalty, as have other 1099ers I know.

"(2) Who is required to make sure taxes are withdrawn from your paychecks? Not you, but your employer." Not correct if you're a 1099.

If you don't fill out a withholding form and you know you're working as a contractor, you are responsible for your taxes. Your employer is not responsible for giving you the estimated tax forms, and they're not responsible for telling you about quarterly payments. Because, technically, they're not your employer. They're a client of your sole proprietorship.

I'm not saying that you shouldn't report the company. I'm just saying that if you do report them, be prepared for the IRS noticing that you didn't pay your quarterly taxes.
posted by PatoPata at 10:15 AM on March 18, 2009

You're absolutely right that a 1099er would be required to pay those quarterly taxes; sorry, PatoPata, for disagreeing with you incorrectly on that. But as I said, in the eyes of the IRS, zoomorphic is and has been an employee, not an independant contractor; so the quarterly taxes are not and were not required. This is retroactive; even if you worked and paid taxes as an independant contractor for a job up to three years ago (according to the SS-8 form) you can still file the SS-8 and claim that your status was employee in order to get tax refunds and the other benefits of employment.
posted by koeselitz at 10:19 AM on March 18, 2009

You should also consider reporting your employer to the NY State Department of Labor. The information on worker misclassification is here. This is an issue that the state is particularly targeting right now.
posted by cushie at 10:38 AM on March 18, 2009

Even if it was with your consent, it doesn't matter.

I've WANTED to be a contractor sometimes (since my tax situation is complicated and I'd rather organize and pay my own, thanks very much) but in some cases was required to be an employee by HR departments in order to comply with the IRS policies. In one case I was even retroactively declared an employee two years after the fact, even though I'd filed and paid taxes myself as a contractor.

So what you wanted, intended, or even agreed-to doesn't really factor in.

Also, employment law is a giant mess.
posted by rokusan at 12:55 PM on March 18, 2009

You should definitely be filing with the relevant state and local authorities here. You might also consider doing the leg-work to find an employment law attorney that could help you if you get fired for turning them in.

There are a number of federal statutes that prohibit retaliatory firing for whistle-blowers -- I have no idea which (if any) of them apply to this specific situation, but your new lawyer would.


Ultimately, the IRS generally doesn't care who pays your payroll taxes as long as they get their 12-ish% from someone.

Valkyrn, this is at least the second time you've wandered into a thread about legal issues to give advice that's so painfully wrong that it could easily be malpractice if you were actually out practicing. Here's hoping you figure out how to quit doing that before you get your J.D. and start causing some real trouble for people.
posted by toomuchpete at 1:10 PM on March 18, 2009