According to the General Accounting Office (”GAO”) study and House Ways and Means Committee study on independent contractors v. employees highlighted that many workers were erroneously treated as “independent contractors” (i.e. those receiving Form 1099-MISC). The last IRS measurement of this was in 1984 where they stated 15% of workers erroneously were misclassified as an “independent contractor.” That equated to 3.4 million workers at that time. This problem has not been eleviated- in fact, it has worsened. The workforce that is made up of independent contractors has risen from 6.7% in 1995 to 7.4% in 2005 according to a May 8th, 2007 GAO Study.
Clearly, the IRS has not studied this issue in years and no other federal agency has identified the extent of the problem. However, they all realize the severity of the issue of misclassification.
How does this effect you?
For federal tax purposes, if you are misclassified, you will owe the full social security and Medicare taxes (referred to as “Self-employment tax”) individually. Also, you will most likely have no federal income tax withheld unless you are making the required estimated tax payments. The SE Tax is 15.3%.
Hence, come April 15th- there is a big surprise on your tax return- a large balance due.
Fortunately, the IRS has some remedies available for contesting your worker classification. Request a Determination of Worker Classification and subsequent filing of your tax returns with notification of this request can save you some liability. If the determination that you are in fact a IC is made- the tax is put back on you. The IRS has just completed the draft of the Form to request preliminary relief while worker classification is determined.
More later on what defines an independent contractor v. employee. It is very technical and requires a extensive review on whether the worker can be controlled and directed.