I had a really similar issue like this to contend with last year-- fresh out of school, being paid nothing, with a bunch of 1099s.

You need to look at a lot of your expenses as business development costs-- so if you were eating lunch to network, spending money for transportation to your contract work, buying architecture books etc. etc., these can become tax deductible. this money is being spent to help you become a better architect.

my roommate was an accountant, and helped me with this. at first, i owed 500 dollars to the government but managed to finagle a very small return, instead. good luck.

This is true, and I have done the math and will have a much lower tax bill once all my expenses are considered. But my current feelings are that I really shouldn't have to bend over backwards because my employers decided to break the law.

were they paying you the consultant rate or employee rate? and did you work as if you were an employee? meaning: regular schedule, your boss is responsible for the outcome of the work, use of the office's equipment, etc.

Paid at the employee rate. And when I became an official employee, my job responsibilities remained exactly the same, only the paycheck was different (because they started witholding).

Are you saying that you were told that you would be paid as a contractor for the first few months and your boss said it's ok- or did you just find out that you were paid as such and your boss is now saying it's ok?

Do not claim expenses for which you do not have receipts and do not have obvious proof (car, rent, insurance)!

While only a slim amount (less than ~20%) of fishy looking tax information actually gets audited, the penalty of tax evasion far outweighs paying back taxes for a year or two.

Sure, you'll be put on a payment plan with a kind of high interest rate... but that is far better than a $10,000 fine, up to 10 years in prison and the cost of court & attorneys fees (tax evasion investigations last for MONTHS).

Did you receive a 1099-MISC before the close of the year or anytime while working?

Or did you fill out a W2 when you started employment?

If anything... since tax evasion is a capital offense, you can turn in your employer and get a hefty award (like more than $3,000 or $4,000).

I mean, in all honesty, he was cheating out of paying maybe 14-15% max of your salary. So, I'd say your firm isn't really doing to well if a few thousand is a stretch for them. If they are doing well, then they are assholes who should pay.

I would give your boss an ultimatum. Make him or her sign a contract with an unlimited cause that bars you from any liability for their actions and that they take full responsibility for their actions.

Because... you're up shit's creek without a paddle! Or you could lie to the government. It's not like they loaned out 1.8 trillion dollars this year and aren't desperately turning over every rock to settle that debt.

It's hard to be sympathetic with your situation, given that admission. Your employer just as easily could claim "we knew this was an employment situation but it was easier (better) for us to bring him on as a contractor." Neither position is particularly strong.

The reality is that the IRS is unlikely to get excited about going after this 'small fry' of a firm (they're more concerned with big companies like Microsoft) and you will do yourself no end of harm if you turn them in. My advice is to resolve this as economically as possible, learn what you can from the experience, and move on.

Life's too short to get embroiled in a pissing match like this one. Even if you win, you'll lose.

what's the issue? you seem to have understood you were being paid as an ic. you owe the money to the feds. i'm sorry that you didn't completely understand the tax structure when you took the job, but this is far from uncommon. i worked my first year out of school as an ic. i negotiated my pay rate taking into account the additional tax burden and quite frankly, i took so many business deductions that year that my tax burden was not too extreme (in fact i put away far more money than i needed to). what happened to you does not sound even close to exploitation.

the short and quick answer is that it is illegal to misclassify someone as an independent contractor if they are performing as an employee.

http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

"it's a gray area but it's okay."

like file said, your employer could easily make a justification for making that arrangement since it was only 2 months and at the beginning of your employment. if it persisted then that's a different story.

jafidler: The issue is that being paid as a contractor vs. employee isn't a matter of choice, it's a one of law. You can't pay someone as a contractor if they don't meet the legal definition for one. And looking at the definitions on the IRS website, well I'm no tax lawyer so I could be wrong, but it looks like there is no way in god's green earth that someone in my situation legally qualified to be paid as a contractor. And in those situations, the law is once again very clear that it is the employer's responsibility, not the employee's, to be in compliance here. I'm not a business owner, I don't have an accountant, a lawyer, or 30 years experience running a firm. They do. They knew. And they knowingly ignored the law. Now, I'm still not sure that I'm inclined to do anything about it. So far, I get the feeling that a lot of other people allow themselves to get run over in this way as well, because they stakes are too high, they don't want to get in a pissing match, etc. etc. But as I said, I am curious if there are any others who resolved a situation like this successfully. Not hearing anything yet...

it just appears from your post that because you knew you had to withhold taxes that you understood the nature of the contractual relationship. i'm not an employer, but in these times where work projections are highly unpredictable, i can certainly understand hiring independent contractors for a limited duration to assess both the individual's skills and if work in the office will allow the employer to hire this person on as a full-time employee. of course, that relationship needs to be made clear in the beginning and a contract written in no uncertain terms that describes the relationship (perhaps that did not happen), but the situation as you laid out does not on the surface sound unethical to me.

if after all that you still believe that there was some sort of deception on the employers' part, there is a section in the link strlt_typ posted that addresses steps you can take with the irs.

cyru42 - what do you mean that you do not qualify to be independent contractor? Its just another term for 'temporary worker' freelancer, even if you have absolutely no experience. These days there a lot more jobs for freelancers than even before because companies don't want to hire people full-time and pay their health insurance. Even prostitutes have to pay tax because they also get 1099...

cyru- it's going to be hard for too many people to empathize with your particular case here. clearly, you knew what your obligations (financially) would be later on. yes, we're all feeling the squeeze and i think most of us do feel for you in terms of knowing how hard it is to make ends meet.

that said, i don't think you have a case to go back retroactively and ask the firm to pay your taxes for you. the primary financial difference between your situation now and then is that they're simply managing the withholding on your behalf. and it sounds like you only have about 2 months of withholding to account for (not including any potential penalties). as for 'resolving' your situation - what are you looking for? for them to cover your own inability to withhold the tax? they've already paid you the amount you owe on the tax....

you can defer your taxes if you can't afford to pay them now.

also, i'm still having trouble determining where you're being exploited. sometimes it's actually beneficial to to be an ic. you can deduct more and ultimately pay less taxes than a salaried person. health insurance and taxes should be factored into your ic wage at the beginning.

SE tax? pretty sure that applies if you are receiving untaxed wages in an IC role-its the gov'mts way to still collect SS/unemployment/disability. and its pretty clear on IRS.gov how to pay it.

SE tax

it sucks but you have to be disciplined to withhold yourself. I agree with the others, your situation is sticky, you aren't the only one in IC limbo (this happens a lot and there are procedures to deal with it) and you DO owe the gov'mt money.

how big can the tax obligation be on just a few months wages anyways?

I'm not fresh on the laws of employee vs IC, but since you are an employee now, don't you have to ask yourself when and why did your employer suddenly decide to do the right thing (making you an employee) before accusing them of doing something unlawful (misclassifying you)?

From IRS website:

"However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."

ICs cannot be treated like employees or be micromanaged. If a firm ICs you, the contract is for a deliberate product or service to be delivered be terms of the contract.

They can only control the quality and delivery of said item.

Out of professional courtesy you might want to obey their standards of conduct.

But yeah, employers cannot treat ICs like dirt.

Strawybeary, the self-employment tax rate is ~%15.3.

Half of the taxes you pay can be written off on your 1040.

So, if I made 50,000 a year... $46,175 in earnings, $7100 in taxes.

So, you can deduct SE off income. And you'd be left with a maximum $9800 tax bill.

So, $16,900 in total for $50,000. Didn't add in deductions, expenses et cetera.

i'm a bit confused...
were you only an independent contractor for a few months and then hired on as a regular employee? because that's common practice especially where i am in nyc.

the only thing that would be illegal is if they kept you on for a year as a 1099 as your sole source of income while also working 40hours/week. at that point your employer would be liable for paying all of your taxes.

i've been working as a 1099 for over a year now and at least in nyc tax rates are very high for an independant contractor. i buy a lot of books and magazines and health care to defray the cost, but it's still a big chunk of change every four months.

He knows he was an IC

The issue is it is actually ILLEGAL for his employer to classify him as an IC. The government is actually cracking down on this right now. Budgets are short... they look for money everywhere they can.

Legally it does not matter that he knew he was an IC if the contract between him and his employer are illegal. Unfortunately this is common practice in architecture but that may change given the governments current position.

I actually prefer being an IC.

cyru42

Having said that you should just suck it up hire an accountant and look for as many deductions as you can, you can probably find enough deductions to where the accountant will pay for it's self and you may not have to pay any taxes out of pocket. If you go to your boss and tell him this is illegal he's not going to say ok and pay it for you, the only way that will happen is via a lawsuit and that will be VERY expensive!

this is a gray area, you have to look at intent.

This happens a lot with small offices. The first time I experienced it was at my first summer internship in New York. It sucks because you are usually being misclassified as an IC rather than an employee. I know that when you are filling out your tax form it says it is illegal to do that, but I think that psycho-mullet is right. It is expensive for you to do anything about it.

What my first experience taught me, and what I hope this experience teaches you, is what you can do the next time you step into an IC situation. I asked for more money, I got health insurance, I started my licensing process, etc. All of these things can be deducted as an IC and will help make your sucky tax burden be less sucky.

An upside is that NCARB redefined what an employee is. Before, you couldn't count IC positions like yours (where you were probably misclassified) towards IDP. I assume they did this because it is a common practice in architecture.

I have been audited before on this very question, but being very young at the time (18) I did not understand the law and my employer was clearly in the wrong. I don't think I explained the situation very well to the IRS agent assigned to my case as I did not understand the law. That said, it's not such a grey area as you'd think -- there are in fact clear rules about this and they pertain to the questions someone stated above:

did you work as if you were an employee? meaning: regular schedule, your boss is responsible for the outcome of the work, use of the office's equipment, etc.

If you have a REGULAR SCHEDULE during which time you are expected to be present at the office, and this is a daily schedule, like "be here from 9 to 5 with an hour break for lunch", you are an employee. A contractor is totally independent -- ie, they make their own schedule, in consultation (presumably) with the company hiring them. Think about the difference between an employee of an architecture firm and, for example, the outsourced IT guy who comes in on call, or once a week (on his/her own schedule) to check up on the computers, check the backup, perform network maintenance, etc. That guy is an independent contractor. If your boss sets your schedule, you are an employee.

That's probably the clearest way to tell. Another way to tell is the chain of command -- if you are working on projects that someone above you is managing and you are responsible to this person on a daily basis, you are an employee. If you are fulfilling a contracted portion of work that is written out in advance of the date you begin working and it is project-specific (rather than "you just help so-and-so with whatever they need every day), then you are a contractor.

Does this help?

Here is my absolute advice : make an appointment with an IRS agent to sit down and go through this with THEM. Most likely, they will identify this (correctly) as an improper tax dodge. Your employer will simply have to settle the amount to the IRS that they should have paid for that month at the time that it occurred, and you will be responsible for regular taxed wages.

You may be tempted to "let it go" and pay the self-employment tax so that your employer doesn't get "mad" and lay you off, but you should know that
a) this will hurt you a lot more than it will hurt your employer, partly because it means more to you monetarily and partly because b) the self-employment tax rate is WAY higher than the regular tax rate (which is why consultants get paid huge amounts... well part of why, at least). Self-employment tax actually ends up double-taxing you on a small portion of your income -- a fact that was confirmed to me by the IRS agent assigned to my case. It seems illegal, and in fact it should be, but there it is. You will actually pay more money under self-employment than your boss will to go back and pay for regular payroll taxes on that time he/she labelled you as a "contractor".

Do not pay this money, it is a scam and you being made to help float the office's expenses. There are many many advantages to firms to lie about this and it's yet one more example of the rampant employee abuse found in this profession. (For example, say a firm needs help but doesn't want to hire someone they then have difficulty letting go of (like if it isn't an employment 'at-will' state) -- they just hire the person "as a contractor" and voila, not only do they evade payroll taxes but they don't have to cover health insurance and they can fire this person at will, without needing to prove that there was just cause, and without worrying that the person will have grounds for a wrongful termination suit! Isn't that so great! Too bad it is immoral and shows you just how unimportant the employees are to this boss.

To sum up : I disagree, it is NOT expensive for you to do anything about it and the self-employment taxes will gouge you. MAKE AN APPT WITH THE IRS and let them handle it. They used to even have a "report a tax evasion scam to the IRS" phone number somewhere. But you should make an appointment with an actual person and get them to review it. Don't go to a lawyer -- what are you going to do, sue? It's not something that needs to be sued for -- just let the government handle it. They may make you pay the tax while they sort it out (and then credit you later) but if so, you won't be any worse off than you are now.

Also, I'm sorry but the reality is that if you were not a true contract employee and did not really know what that meant, then the likely expenses you incurred during that month will not be enough to offset the gouging that self-employment tax brings. Plus it is a pain in the ass to itemize all that shit, and legally you need to have receipts on file for it (just in case).

And trust me, I was audited on this issue, and it was for $500. Yes, they audit the little guys. And when you go in there and say, "well wait a minute I ate lunch every day near the office, I should claim that" they will say "where are your receipts?" If you weren't tracking it at the time there's no way you're going to be able to come up with a proper claim for it now, and for enough $ that it offsets the self-employment tax.

Take this up with the IRS, now.

From How To Talk With The IRS, which is not otherwise a particularly useful blog post but does include this advice:

"Remember that IRS agents are just people performing a job and paying their bills. Most are very nice and want to help you resolve your issue. So, don’t be afraid to talk to an IRS agent – it’s your money."

AN EXTREMELY GOOD GUIDE TO WHAT YOU SHOULD DO:

Determing If You Qualify As A Misclassified Worker (and what to do about it)

One of the ways to tell if you're an employee instead of a contractor:

"Your Co-Workers Do Not Get 1099s
Often, you can determine your status simply by taking a look around you. It may be that your co-workers are performing similar services under similar direction and control (which means the company not only tells you what work to perform but how and when it gets done). If this is the case, and those co-workers are treated as employees, then you should be, too. The IRS says go ahead and use Form 8919."

Apparently, there is a form SS-8 to file with the IRS that will get them to rule a determination of whether or not you are an independent contractor. Once they rule on that, you can file your taxes per form 8919 which is for misclassified workers and helps you figure what your medicare and SS taxes would have been, etc.

Get started on this process now and remember that you can file for extensions if it isn't all cleared up by the time April 15th rolls around.

"The company you work for may be paying you as an independent contractor but treating you like a regular employee. If so, the IRS has issued Form 8919 for misclassified workers. It is used to figure and report your share of uncollected social security and Medicare taxes due on your earnings. Filing the form may mean paying less than you would in SE taxes, but the employer will pay more. Use Form 8919 if one or more of the following is true."

mantaray, good point. Talking to the IRS is a good idea with all tax issues. Worst case if you do have to pay it, they can put you on a payment plan where you pay $200/month or what ever you can afford.

I don't know if it is too late, but you can file form SS-8 with the IRS to determine if you were mislabeled as an IC when you should have been an employee.

Here is the PDF of the form.