Everyone avoided taxes. Now what?
November 5, 2010 6:14 PM   Subscribe

My boss at my new job has most likely been mischaracterizing his employees as 1099's rather than W-2's. They paid their federal and state income taxes, but never their social security. Now they owe back taxes and penalties. Who's liable?

I've only been at this job for about a month now, so this question doesn't apply to me as much as my coworkers.

There are five employees, including me and another who very recently quit, at this company. Three of them have been there for 3-5 years, and one guy for 8 years. There was another employee who recently quit who'd been there for three years. These people, by any standard, should be reported as W-2's and taxed appropriately. Instead, they were all reported as 1099's. They paid all their state and federal income taxes but not anything else.

To be fair, they really wouldn't be expected to know the difference. The kid who quit and one of the other guys are both 20, and started working here while still in high school. This has been the only job either of them have had. They other two employees are elderly and Asian, with only moderate (at best) mastery of the English language, and have been filing out W-2's most of their life.

The IRS never said anything to any of them, so they all thought they were in the clear. Then one of the 20 year old kids quit, got a new job, and all of a sudden owed tons of back taxes. Now everybody at the company is and nervous. Also, nobody has told my boss anything, and they don't plan on until they figure out what to do.

According to this pamphlet (PDF), the employer is liable for those taxes. But this has been going on for, at least one of the guys, the last eight consecutive years. Everybody who works there will owe tons of taxes. On top of that, the two elderly Asian employees have not contributed to social security for several years.

I know YANAL (or maybe you are!), but who at this point is liable to pay all those back taxes? What else should we know about this whole mess?
posted by Geppp to Work & Money (12 answers total)
I am not lawyer, accountant, etc. but something I can't figure out about your question:

The employee gets a W2 or 1009 to file their taxes with at the beginning of the new year ... was this boss sending everyone W2s while claiming them as contractors on his end?
posted by Rube R. Nekker at 6:48 PM on November 5, 2010

sorry, *1099* form, rather
posted by Rube R. Nekker at 6:50 PM on November 5, 2010

Response by poster: Sorry, I'm new to all this tax terminology, but everyone got 1099's while the boss reported them as such despite them clearly being his employees
posted by Geppp at 7:07 PM on November 5, 2010

Using a 1099 instead of a W2 is illegal if, in fact, the individual being paid is not a contractor or vendor. As I understand it, the employer was in violation of IRS regulations.
posted by HuronBob at 7:17 PM on November 5, 2010

I believe there are two issues here.

1. The boss was saving money by calling his employees "independent contractors" instead of regular employees when they probably qualified as employees. This is wrong and there are laws about it.

2. The 1099 employees all paid their taxes wrong in the same wrong way?

I am slightly confused by part of this. Basically if you get a 1099, when you do your taxes it's pretty much crystal clear that you have a 1099 and that you are the one responsible for paying your own state and federal tax and social security. That's what being a contractor IS. The tax forms would have led you through this in this way.

So the boss screwed up bigtime for #1 and probably has crap he needs to deal with. However, it's unclear to me [and I'd suggest talking to an accountant or a tax lawyer about this point] whether his responsibility for this part makes him responsible for the taxes that the employees didn't pay.

In other words, the employees knew they were 1099 employees, rightly or wrongly. Why didn't they pay social security as their tax forms would have directed them to do? Did they think the boss had paid them, or was supposed to pay them?
posted by jessamyn at 7:35 PM on November 5, 2010 [1 favorite]

OK, based on your info, there is a possibility that not everyone mis-filed and that one guy's back taxes were due to his own errors.

Unfortunately, if the employees received 1099s the onus was on them to file their taxes correctly. But, as HuronBob says, boss likely is breaking the law. This tact has been depressingly common in the business world since the '80s.

My guess is that all the employees as a group would have to lawyer up, and that may mean you would have to kiss that job goodbye. If your local is the same as your profile, maybe the folks in the legal aid society could help steer you in the right direction.

On preview, what jessamyn says.

Sorry, I wish I could help more. Shady people suck. Best of luck.
posted by Rube R. Nekker at 7:39 PM on November 5, 2010

Response by poster: 2. The 1099 employees all paid their taxes wrong in the same wrong way?

Yea, I think that's what actually happened.

"Did they think the boss had paid them, or was supposed to pay them?"

Yes on this account too.
posted by Geppp at 8:05 PM on November 5, 2010

Yeah, I've seen other people make this mistake too ("self-employment tax? But I'm not self-employed..."). But there's also the difference, if I recall correctly, between the half of your social security taxes that YOU pay (or that is withheld from your pay) and the half that your boss is supposed to pay to match that. At the very least you'll owe back taxes on the part that wasn't withheld if you didn't pay that; I'm not sure whether you or the boss would be considered responsible for the portion that the employer is supposed to contribute (so, Nth-ing talking to a tax lawyer).
posted by Lady Li at 8:21 PM on November 5, 2010

This is very common for extremely small businesses that only have a couple of "employees". Yes, it is not lawful, but I see it all the time IAACPA, IANYCPA). What someone in your position would typically do is file a Schedule C-EZ.

Some employers do this feeling if they pay a buck or two above minimum wage they are paying their staff enough to cover what becomes their share of FICA or payroll taxes. They are also giving their employees an opportunity to "expense business expenses", aka costs that might be attributable to employment, that could be subtracted from your taxable income. This would be shady, but again it has become pretty common.

The policing side of this had been very lax by the IRS so people have become accustomed to doing things in a less than totally above board way.

It sounds more likely that people didn't file at all. When a 1099 is issued the employer/issuer sends a corresponding 1096 to the IRS reporting payments made to individuals with their SS#'s. The IRS then tracks to see if that is reported as income. I can't imagine that everyone is confused by this. If they paid income taxes and filled out the form it would be very clear how to compute FICA and how to pay. Also when you started did you fill out a W4 as an employee or a W9 as a contractor? This would have been the form that you fill out with your social security information.

And when it comes to taxes, people tend to play dumb because they hope ignorance of the law will sheild them from consequences. So maybe all your co-workers were confused, maybe not. Your employer will probably soon get caught as well and will pay back taxes and penalties.

As for you, you've been paid as a contractor so make sure you pay taxes accordingly, never mind what the employer does. I don't know how much leverage you have to make the employer start paying payroll taxes immediately if this is something they have never done in the past and as far as they're concerned it has become their common business practice.
posted by readery at 8:57 PM on November 5, 2010

What Lady Li said. Among the people who have made that mistake are our current Treasury Secretary and... me.

In my case, I was attempting to do my own taxes and did not realize that 1099 = self-employed. Later when the tax form told me to take certain actions if I was self-employed, I just skipped happily past. After all, I was a full time employee...

While I am an admitted financial idiot, the forms at the time didn't make it easy to connect the dots.
posted by centerweight at 10:01 PM on November 5, 2010

And when it comes to taxes, people tend to play dumb because they hope ignorance of the law will sheild them from consequences. So maybe all your co-workers were confused, maybe not. Your employer will probably soon get caught as well and will pay back taxes and penalties.

I think this explains a lot of it. It is easy to get confused, but it says right there in the instructions "if you are an employee who received wages from an employer who did not withhold Medicare and Social Security tax from your wages, you may owe this tax. See form..."

And don't you get a Social Security statement in the mail every year? What did you think when they were all zeros for the years you were working?

Anyway, of highest importance to you and your coworkers is that you get credit for the time you have worked so that you can qualify for benefits should you need them. It's pretty easy to qualify for retirement by the time that's necessary, but if you should become disabled, you might not qualify for SS benefits. If it was me, I would call the IRS and ask them the question straightforwardly: my boss pays us as 1099 contractors, and we think we are employees. What should I do to fix this?

Everyone that I have met who has had occasion to call the IRS to ask a question has been impressed with the high level of service they got. The IRS is pretty casual with people who need to make payment plans and what not. You pay late, you pay the interest + penalty. All good. You only get screwed if you ignore them.

Then maybe call the social security people if the IRS doesn't tell you what to do.

Look at it like this: if you owe money, this is money that you WILL have to pay at some point or another. Better to know about it and make arrangements now, instead of having it come up at some inopportune time.
posted by gjc at 8:19 AM on November 6, 2010

I'm not an expert or anything, but tried to become informed on this subject as I am a 1099.

Look into filing a form SS-8. This will start an investigation into whether or not you were wrongfully claimed as an independent contractor. Collect evidence for your claim, things like: were you able to set the scope of your job duties? If you'd rather not file this yourself (and your boss will be informed of it) see if you can get the person who no longer works there to start it. Then you'll need to file a 8919.

Good luck. This will probably take a long time to be fully resolved, but I'd be confident in your employer eventually being held responsible for your employee taxes.
posted by fontophilic at 10:04 AM on November 6, 2010

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