How can I get back my self employment tax?
January 29, 2016 10:00 AM   Subscribe

I spent almost all of 2015 working full-time for a big company through a temp agency, but the temp agency misclassified me as a contractor. This means that I'm on the hook for self employment tax, which is 7.65% of the year's income! I'd like to avoid paying that tax. What's the best way to do it?

So I started working at Acme corp. through Temp Agency in late 2014, and continued until the end of November 2015, when I was hired directly by Acme as an FTE.

When I first started with Temp Agency, they told mentioned briefly in the onboarding process that they would be paying me with a 1099, and I didn't question it. I had just moved to a new city and really needed work, and I didn't expect it to be anything more than temporary, so I didn't question it. I had also never worked through a temp agency before and assumed that maybe this was the norm.

Well, the temp job turned out to last a lot longer than I expected. About halfway through 2015 someone told me about the added cost of self-employment tax, which I had been completely unaware of, and I also discovered that all the other temps working at Acme through Temp Agency were on W2s. So I called Temp Agency and asked them to switch me to a W2, and they said they could do it but it would mean lowering my pay rate. Obviously, highly shady. I declined that offer.

(For what it's worth, I meet all the criteria for an employee per the IRS guidelines. In my eyes there's definitely no gray area about whether I was actually a contractor. No idea why I was singled as a contractor in contrast to the other temps.)

At that point, there were some internal struggles going on in the project I was working on at Acme, and things were a bit shaky between me and my boss, so I didn't really feel like I could ask Acme to pressure Temp Agency to make things right (Acme was unaware I was being paid on a 1099 until I told them, later on). Things eventually changed there, but at that point there was already talk of hiring me as an FTE, and it didn't seem worth it to deal with Temp Agency just for a month or two of W2. The hiring process dragged on, yada yada. Long story short, I ended up with 11 months out of 12 being paid as a "contractor". By my estimate, the self employment tax I will have to pay is thousands of dollars, which I will struggle to afford right now.

In my research here and elsewhere, it seems the thing to do is to a file my taxes with a Form SS-8 (to get the IRS to rule on my classification as worker vs contractor) and a Form 8919 (to report uncollected social security and Medicare tax). I'm having difficulty filling out the SS-8 because the way it's framed assumes that I was performing work directly for the company who misclassified me, when in fact I had almost zero contact with Temp Agency, and did all my work for Acme. So any advice on how to handle that by someone who's been through a similar situation would be greatly appreciated.

But since there is still time left before taxes have to be filed, my instinct is just to contact Temp Agency directly and ask them to pay me back their share of the taxes, so I can avoid all this extra paperwork. I'm not hopeful that they'll just fork it over, but I assume they probably don't want to get the IRS involved either, since there are penalties for misclassifying employees as contractors.

Is there any good reason not to ask Temp Agency for the money back? I'm not a lawyer and not interested in paying one, so it would just be me writing them, saying "hey, you misclassified me, please send me a check for 7.65% of what I earned to this address." Of course they can just refuse or ignore me, but is there a risk that alerting them to my intention of pursuing will somehow hamper my case with the IRS, if it comes to that?

(Also, I live and work in California. Temp Agency's headquarters are in Massachusetts, if there is jurisdictional relevance.)
posted by dadaclonefly to Work & Money (9 answers total) 1 user marked this as a favorite
What's the best way to do it?

I'm not a lawyer and not interested in paying one

Your second quote aside, the best answer to your first question is still: Get a lawyer. Have the mods delete this question. Tell the lawyer your desired outcome and do as they instruct.

It will cost less than 7.65% of a year's pay.
posted by mikepop at 10:26 AM on January 29, 2016

The question of whether you were properly classified as an independent contractor may be more complex than you imagine. For example, you write "I meet all the criteria for an employee per the IRS guidelines. In my eyes there's definitely no gray area about whether I was actually a contractor. " But just as example, the IRS suggests that an employee is more likely to be hired with the expectation that the relationship will continue indefinitely, but you mentioned that initially you expected it to be only temporary, so you wouldn't seem to meet that particular criteria.

And the fact that you had "almost zero contact with the Temp Agency" again would be more likely in an independent contractor relationship than an employment relationship where "detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor." If all Temp Agency told you was "Show up at Acme and do what your told," it's not quite clear that you meet the IRS criteria for an employee in this regard either.

I don't note this to suggest that you are wrong about your proper classification, but that demonstrating that your status was properly a W2 employee may be a bigger part of the process of correcting this than you anticipate. Much of this is due to the fact that many of the factors that would mark you as an employee relate to your relationship with Acme rather than Temp Agency, which complicates this issue. (And this is something I think many Acmes and Temp Agencys count on in order to do exactly what they've done here, shift the tax burden from employer to the worker.)
posted by layceepee at 10:44 AM on January 29, 2016

A couple things –

Working as a 1099 means you are on the hook for your own taxes. Your pay rate should be higher to account for the fact that you pay your own taxes, you get no benefits of a regular employee (someone handling your payroll taxes – medicare payments, social security, etc.). The fact that you did not account for paying your own taxes does not mean that anyone has necessarily wronged you here or owes you anything.

Working as a W2, you often get paid a lower hourly rate because your taxes need to be paid and other administrative things get taken care of for you in the course of your work. There are also other protections for a W2 employee.

As a 1099 worker, you can take deductions for work expenses. You should discuss this with a tax professional. You may deduct mileage, business meals, other expenses like professional dues, etc.. Since you were working like a W2 worker, you may not have a lot of expenses that you can deduct but it's worth it to discuss with an accountant.

Once you have taken your deductions, you can then request a payment plan with the IRS. Sadly, I don't think that you are going to get any extra money from anyone. The temp agency doesn't owe you taxes and talking with your employer and the temp agency about how you were essentially W2 worker and they were in error (or fraudulent) in keeping you on as a 1099, will likely jeopardize your relationship with both the employer and the temp agency.
posted by amanda at 10:45 AM on January 29, 2016 [5 favorites]

You can file a wage claim with the CA Department of Labor if you believe you are a misclassified worker.
posted by Nonsteroidal Anti-Inflammatory Drug at 11:06 AM on January 29, 2016

Best answer: they said they could do it but it would mean lowering my pay rate. Obviously, highly shady. I declined that offer.
It's not shady at all. The contractor rate is higher to account for the fact that the contractor owes taxes as a business (i.e., self employment taxes) and has to fund their own unemployment insurance (if any) or workers comp policy (if any).

my instinct is just to contact Temp Agency directly and ask them to pay me back their share of the taxes, so I can avoid all this extra paperwork
Sure, you can contact them. I'd tell them you're planning to file an SS-8 and a state claim to dispute the classification. It's the only incentive they'll have to do anything. Though I wouldn't get my hopes up. Also, don't plan on continuing your employment/business relationship with them.

You'll also want to contact California's Dept. of Industrial Relations if you decide to dispute the classification. The classification of employees is different for each agency (IRS, Cal. FTB, Cal. labor laws, etc.).

I think the hardest hurdle you'll need to overcome is that you asked to switch to employee status, they proposed the wage at which that would be possible, and you chose to stay at the contractor pay rate. It's a facts and circumstances analysis, so one bad fact doesn't spoil the whole claim, but this fact is not in your favor.

I'm on the hook for self employment tax, which is 7.65%
Technically, it's 15.3%. If you were an employee half of this would be paid by the employer, the other half would be withheld from your W-2 wages. Since you were classified as a contractor, nothing was withheld. So, you'll owe 15.3% in self employment tax (both employer/employee halves). The employer half is deductible from your gross income. Since you were 1099, you likely did not have federal and state income taxes withheld either. Prepare yourself for a large tax bill.

I'm having difficulty filling out the SS-8 because the way it's framed assumes that I was performing work directly for the company who misclassified me
If you decide to file it, fill it out to the best of your ability, and don't be afraid to attach an explanatory statement. For payroll tax purposes, usually one that pays you is the "employer" with the payroll tax obligation (but, again, it's facts and circumstances). For other agencies, they could decide it was a joint employment or co-employment situation. Just do your best.

Whatever you do, FILE YOUR RETURN ON TIME - even if you can't pay on time. You can request an automatic extension of time to file (this does not extend the due date for payment).
posted by melissasaurus at 11:17 AM on January 29, 2016 [10 favorites]

Response by poster: Thanks for the advice everyone, although it leaves me less positive than I was before.

Complicating issue: I signed an agreement stating I was a contractor (however, I've read elsewhere that this alone does not make you a contractor in the eyes of the IRS).

On the other hand, I was treated like a non-contractor by Temp Agency in several ways, including being paid overtime at 1.5x, although it was always reported as "reimbursement" on my paystub.

As for damaging relations with my current employer, I don't think pursuing this would do that. They were confused when I first informed them that I was "contractor". I believe they might even go to bat for me on this. As far as relations with Temp Agency goes, that is a bridge I won't be crossing again, so I'm not bothered about burning it.
posted by dadaclonefly at 3:14 PM on January 29, 2016

many, many years ago I had a similar situation, although without the complicating factor of the temp agency. I was grossly underpaid already, so when I approached my boss, hat in hand and claiming callow youth's ignorance and poverty, they immediately agreed to cut a check for the employer's share amount I had calculated. It was, however, also added to my next year's 1099 income.

So a direct a approach can work, without lawyering up or anything, but it will likely still produce 1099 income. These days, I mentally budget for a 30% tax bite on 1099 income and factor that into my rates. So if I want to keep $60/hr on a job, I quote and bill at $90.
posted by mwhybark at 5:09 PM on January 29, 2016 [2 favorites]

Response by poster: Just an update on this, in case anyone down the road finds themselves in a similar situation and wonders which route to take:

I contacted the temp agency directly, with a polite–but firm and detailed–email explaining why I thought they should be liable for the self-employment tax. I basically said laid out my case, asked them to reimburse me for the tax, and said that the alternative was for me to ask the IRS to re-classify me.

They asked me for a figure, I gave them the amount for exactly 7.65% of my total income on the 1099. There was a bit of hemming and hawing on their end, but eventually I got on a call with a manager. There was no argument against my claim that I was improperly classified, but he asked if there was any room for negotiation with the amount. I told him that since I can't negotiate the taxes I owe to the IRS, there was none. He agreed to transfer that amount to me, and later followed up with an e-mail with that figure. The date of transfer is on their usual payday next week, so I haven't seen the money yet, but I'm fairly optimistic that I've been successful here.
posted by dadaclonefly at 2:05 PM on February 26, 2016 [2 favorites]

fantastic! Congratulations, and I am delighted to hear that a direct approach worked for you!

Don't forget to follow up with Acme regarding how they classify the payment - if they issue it to you via your FTE pay mechanism, they may incorrectly withhold against it, or issue it as a bonus without withholding, which will entail some accounting gymnastics on your part when you file for 2016. I would think it would be preferable for them to issue it as reimbursement for business expenses incurred in 2015, which it sounds like they may be doing.

Again, congrats!
posted by mwhybark at 4:03 PM on February 27, 2016

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