Results 1 to 7 of 7

Thread: Can Employer Retroactively Change status 1099 to W2? Federal

  1. #1

    Default Can Employer Retroactively Change status 1099 to W2? Federal

    Hello everyone,

    Here is my situation:

    I worked for a company as an independent contractor during 2007 - signed independent contractor agreement and provided a W-4 giving my business name and EIN. Frequently during course of working for this company, officials made statements about business travel being deductible from 1099 earnings as a business expense, etc. I received a 1099 from them and completed my taxes by filing a Schedule C and deducting from my business gross significant 179(a) expenses, as well as other equipment, services, etc (common business deductions). Because of my income level and number of children, I qualified for a substantial refund due largely to EIC.

    Last week, I get a letter from them explaining that "after a review of operations" myself and others who operated in a similiar position within the company were being reclassified retroactively as employees rather than independendent contractors. We were issued a "corrected" 1099 showing zero income in 2007 and a W-2 stating our gross pay as wages (of course, the W-2 states my EIN, since they don't have my SSN).

    I crucnch a few numbers and realize that amending my return to show this income as W-2 wages and not business income will cost me over $3,000.00 in taxes and reduced (eliminated) Earned Income Credit for that year. I also qualified for some food and medical assistance from the State that year based on my earned income, and my amended return would cause me not to have qualified, possibly leading to a recoupment claim.

    My questions: (1) Can an employer retroactively and unilaterally reclassify a person as an employee when there was a contract stating otherwise and the person does not wish to be so classified?

    (2) If the employer can do this, can the taxpayer (me) petition the IRS to reclassify me as an IC and not an employee using the procedure usually employed in reverse by people seeking to be considered employees, claiming the IC designation to have been improper?

    (3) If I can't get relief under the above theories, would the employer's actions constitute an actionable breach of the independent contractor agreement (where they state specifically that I am an IC and my income will be reported by 1099 and not W-2, since I relied upon their representations of status to my detriment (by making large purchases and engaging in travel in reliance upon such items being deductible)? Sounds like first year contracts to me, but I've been out of the game for a while.

    Note: I have a JD and was an atty in private for 10 years before getting out of the rat race, so I know the basics, but very little about the nuts & bolts of tax law. Any assistance, particularly in terms of keeping my IC status and not having to file suit, would be greatly appreciated.

    Thanks!

  2. #2
    Super Moderator
    Join Date
    Jun 2006
    Location
    California
    Posts
    12,291

    Default

    I can give you part of an answer. Both IRS and federal DOL have rules on worker classification. States also have their own classification rules, which also can give different results then either of the federal agency rules.

    If these rules (which do not have to give the same answer) say that you should have been an employee, then you are an employee. This is not the sort of thing that the employer and worker can legally decide between them, but is rather determined by reviewing objective factors.

    You mention that you have a contract saying that you are IC. That is fine, but it is sort of like telling a traffic cop that you and your employer have a contract that the police cannot give you speeding tickets. You and your employer cannot legally contract something you had no legal control over in the first place. The government is very clear that at the end of the day the only party whose opinion matters on worker classification is theirs.

    I do not know the mind of your employer/customer (ICs do not actually have employers). I do not know what the proximate cause of the reclassification is. It could be an audit. It could be a lot of things. I do know that if the government (any of a number of different agencies) has decided that you are an employee, then you are an employee. And it is to the advantage of the government to make such a classification.

    Regarding petitioning IRS, sure, why not. File a form SS-8. Just be clear that it is to IRS's advantage to decide that you are an employee.

    Regarding a possible "detrimental reliance" action, I guess that anything is possible, but there is every possibility that no one has ever won with the facts that you have listed. Talk to a local attorney. Stranger things have happened. Still, since the classfiication is legally a function of statute, there are limits to how far a claim of a breach of an seemingly illegal contract would go.

    IRS worker classification rules.

    Federal DOL worker classification rules.
    Last edited by DAW; 04-14-2009 at 07:20 PM.
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)

  3. #3

    Default

    Thanks, DAW, for the reply!

    Here's a little more of the situation. One of the similarly affected contractors had in fact filed a complaint with the IRS regarding her classification, and the matter was making its way close to a decision when the company reclassified her, and the IRS refused to issue a rulling, claiming the matter was rendered moot by the company's action reclassifying her.

    Then a few months after that, they reclassified all the other former contractors. I'm aware of the criteria the IRS uses in making IC vs. Employee determinations, and believe, at least in my case, that they were correct in their initial status agreement that I was an IC. Yes, I know that the IRS loathes the self-employed and are conservative about classification (since you're right, in most cases, it does benefit the government). Oddly, all of my research shows those cases are overwhelmingly brought by IC's who want reclassification as employees, not vice-versa. I could not find a single case where an IC was fighting to remain an IC.

    Essentially, I worked supervising another group of lower-level independent contractors who performed call-center type work for the company. I worked from home, had great latitude in supervising the other IC's, had no set hours, was required to use my own equipment, internet connection, phone, etc and was not reimbursed for any of those expenses. There were also optional meetings at the "home office" which I attended, and was required to bear my own travel expenses when I chose to attend. In short, I would never have worked for this company if I was unable to deduct these as business expenses.

    Interestingly, they have not changed the status of the lower-level IC's who were doing the actual calling, even though those folks look more like employees according to the IRS criteria than the supervisors did (i.e. they had set schedules, had to use the company's front end software to do their work, etc).

    For their part, the company believes they were correct also but made a "business decision" following that one case to simply change everything & pay the 7.53% employer contribution to SS/Medicare rather than have to deal with people on a case by case basis.

    Does that change any part of your impression? (looks like filing the SS-8 is very much in my future. - might be an easy sell since the company will not defend that I should be an employee).

  4. #4
    Senior Member
    Join Date
    Mar 2007
    Posts
    124

    Default

    Quote Originally Posted by Don Giovanni View Post
    Thanks, DAW, for the reply!

    Here's a little more of the situation. One of the similarly affected contractors had in fact filed a complaint with the IRS regarding her classification, and the matter was making its way close to a decision when the company reclassified her, and the IRS refused to issue a rulling, claiming the matter was rendered moot by the company's action reclassifying her.

    Then a few months after that, they reclassified all the other former contractors. I'm aware of the criteria the IRS uses in making IC vs. Employee determinations, and believe, at least in my case, that they were correct in their initial status agreement that I was an IC. Yes, I know that the IRS loathes the self-employed and are conservative about classification (since you're right, in most cases, it does benefit the government). Oddly, all of my research shows those cases are overwhelmingly brought by IC's who want reclassification as employees, not vice-versa. I could not find a single case where an IC was fighting to remain an IC.

    Essentially, I worked supervising another group of lower-level independent contractors who performed call-center type work for the company. I worked from home, had great latitude in supervising the other IC's, had no set hours, was required to use my own equipment, internet connection, phone, etc and was not reimbursed for any of those expenses. There were also optional meetings at the "home office" which I attended, and was required to bear my own travel expenses when I chose to attend. In short, I would never have worked for this company if I was unable to deduct these as business expenses.

    Interestingly, they have not changed the status of the lower-level IC's who were doing the actual calling, even though those folks look more like employees according to the IRS criteria than the supervisors did (i.e. they had set schedules, had to use the company's front end software to do their work, etc).

    For their part, the company believes they were correct also but made a "business decision" following that one case to simply change everything & pay the 7.53% employer contribution to SS/Medicare rather than have to deal with people on a case by case basis.

    Does that change any part of your impression? (looks like filing the SS-8 is very much in my future. - might be an easy sell since the company will not defend that I should be an employee).
    Do you not realize that you can claim the same expenses that you claimed as an IC on form 2106 and Schedule A? Its true that if you don't already itemize on Schedule A that it might not give you quite good a result, but you can claim the expenses.

    In addition, you will not have to pay the employer's share of social security and medicare taxes, so that should offset things somewhat.

    Go to a tax professional and have the numbers re-run. It may not hurt you as much as you think it will.

  5. #5
    Super Moderator
    Join Date
    Jun 2006
    Location
    California
    Posts
    12,291

    Default

    My understanding is that it is always legal for an employer to classify a worker as an employee. The government really leans that way and all of the penalties are going in the other direction.

    If you (the OP) wants to file the SS-8, your call. Or talk to a local attorney about your contract, also your call.

    I can say that employers who know what they are doing only classify a worker as IC if they can strongly support the decision. There is a strong feeling that if it is close, that the government will say that the worker is an employee, so smart employers do not give the government a stick to hit them with.

    Regarding other workers who are still IC, I still do not know the mind of the company. It is possible that they are reviewing each group one at a time and some group had to be at the front of the line (and others to the back of the line). I will say that if someone with a classification similar to yours has already waved a red flag at the government, that would be enough to put the review of those types of employees to the front of the line IMO.
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)

  6. #6

    Default

    It does seem uphill, but it's also something I can't just let go. I don't itemize and while doing so would provide some measure of relief, having to pay the employee portion of SS/Medicare that was not withheld, combined with the loss of EIC results in a deficit of $3,200.00 - the numbers have been run both ways through my software.

    The return does also become a logistical nightmare because I had other customers in 2007, and all of the equipment & expenses were purchased for my entire business operation - there's no way to separate out whether this paperclip or ream of paper was used for this customer or a different one, let alone the larger assets like computers, printers and phone systems.

    Thanks for your input. I have a meeting with the company today to discuss this & if I can't shake them into reversing course, I'll just have to do what I can through the IRS & the courts if necessary.

  7. #7
    Senior Member
    Join Date
    Mar 2007
    Posts
    124

    Default

    Quote Originally Posted by Don Giovanni View Post
    It does seem uphill, but it's also something I can't just let go. I don't itemize and while doing so would provide some measure of relief, having to pay the employee portion of SS/Medicare that was not withheld, combined with the loss of EIC results in a deficit of $3,200.00 - the numbers have been run both ways through my software.

    The return does also become a logistical nightmare because I had other customers in 2007, and all of the equipment & expenses were purchased for my entire business operation - there's no way to separate out whether this paperclip or ream of paper was used for this customer or a different one, let alone the larger assets like computers, printers and phone systems.

    Thanks for your input. I have a meeting with the company today to discuss this & if I can't shake them into reversing course, I'll just have to do what I can through the IRS & the courts if necessary.
    I REALLY think that you should get a consult with a tax professional. I REALLY don't think that you should be relying on your software.

    If you have other customers, then the expenses of the "business" can all go on your schedule C, which would likely create a loss, and then the loss can offset some of your W2 income.

    That was also information that should have been included in your very first post...which is again another reason why a consult with a tax professional is critical. We don't know what other information you have neglected to share, which might effect the outcome.

Similar Threads

  1. (2002) Implanted Microchip Lawsuit
    By Martin F. Abernathy in forum Small Claim Court
    Replies: 3
    Last Post: 05-01-2011, 02:05 PM
  2. Question concerning the federal tip credit. Georgia Federal
    By G money in forum Wage & Hour Laws - Minimum Wage Laws
    Replies: 1
    Last Post: 02-22-2009, 12:24 PM
  3. can employer force you to change status or reassign you? Pennsylvania
    By pensteeler36 in forum Pennsylvania Labor Laws
    Replies: 2
    Last Post: 07-18-2007, 08:25 AM
  4. Reporting Pay/Min Hours Worked
    By LLayman in forum Wage & Hour Laws - Minimum Wage Laws
    Replies: 19
    Last Post: 03-22-2007, 12:44 AM
  5. adjustement of status question
    By Amanda in forum US Immigration Law
    Replies: 33
    Last Post: 02-20-2004, 07:47 PM

Tags for this Thread

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •