Your 1099 Should Have Been a W-2
Due to the widespread problem of employees getting 1099-MISCs from their employers instead of W-2s, the IRS created a new form in 2007 – the Form 8919. Using this form has saved employees thousands of dollars, while protecting their Social Security records and their tax status. Though it does take a little finesse to use this form and this strategy.
Who is allowed to use this form?
Form 8919 may be used by people in these 9 situations:
- You had a job and your employer ended up not paying you as an employee, but as a freelancer.
- You got a W-2 from your employer for your basic duties. But when it came to bonuses and commissions, he put that on a Form 1099.
- You started your job thinking you were an employee, but you and your boss are unclear about the correct status, so you filed the Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating that you are an employee of the firm.
- You were designated as a “section 530 employee” by your employer or by the IRS prior to January 1, 1997. That’s a special category for people in certain industries where it’s common to treat workers as freelancers.
- You have received other correspondence from the IRS that states you are an employee. Often, as a result of an audit of the employer.
- You were previously treated as an employee by the firm and you are performing services in a similar capacity and under similar direction and control.
- Your co-workers are performing similar services under similar direction and control and are treated as employees.
- Your co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.
- You have filed Form SS-8 with the IRS and have not yet received a reply.
So you fit one of those categories.
How do you report your income on your tax return? And how do you handle deal with the 15.3% self-employment taxes you would normally have to pay on that 1099-MISC income? After all, as an employee, you would only have to pay 7.65% from your wages. At $50,000, you’re stuck paying nearly $4,000 extra because of that 1099-MISC.
This is going to take a bit of extra work. Why?
One of our goals is to avoid tangling the IRS computer. The IRS computer looks for income to appear wherever the particular form that was issued is expected to be reported.
- Step 1 – Start out by reporting all 1099-MISC income on Schedule C – Profit or Loss From Business. Whether it’s correct or not.
- Step 2 – In Part V of Schedule C, deduct the amount that should be wages. (This is just in case you have other 1099-MISCs that are correct.) On the description line, write “See Form 8919.”
- Step 3 – Fill out Form 8919, reporting that 1099MISC income in column (f). If you happened to have also gotten a W-2 from that employer as part of your income, you simply use code H in column (c) – and you’re done. If not, there’s another step to take – and it’s a biggie.
- Step 4- Fill out Form SS-8. This is an intensely detailed form. This is where you describe your job and the work you do. This is where you convince the IRS that you really are an employee. If there is anyone else at the company being paid as an employee, be sure to compare your job to his or hers and why the nature of your employment is not really any different. This form can take several hours to fill out. Attach any evidence you have of being treated like an employee. For instance, working in their offices; using their computers and telephones; having your extension on their voice mail; having to wear t-shirts or jackets with the company logo; having to work during their specified hours; having a key to the office or facilities; having a company business card with your name and title on it. The more proof you provide, the better are your chances of getting this approved.
Note: You need to send a copy of the SS-8 with your tax return and to a separate IRS address in Holtsville, NY.
When the IRS approves you as an employee, you save that 7.65% that the employer should have paid. That’s a huge tax break.
OK, here is the downside to this procedure.
When the SS-8 is filed, the IRS contacts the employers to get their side of the story. Oops. This is a rather uncomfortable situation for the employer – kind of like a mini-audit. And it can turn into a full-blown audit going back 3-6 years.
So, if you got a 1099-MISC that should have been a W-2, and you want to keep your job, think twice about filing this Form 8919 and SS-8. Even if your state has laws preventing you from being fired, you will wish you had been fired. Employers have been known to make life a living hell for employees who have turned them in.
How can you avoid the hostility and danger?
Here are two ways you can handle this.
- Discuss this employment arrangement with your employers and ask to be reimbursed for their share of your taxes, or to be put on payroll from now on.
- File your tax return without using the Form 8919. Look for another job. Once you find another job, you have three years to amend your tax return, use Form 8919, and get the money back. (Right now, that means you can still amend 2011 until April 15, 2015 – or until the date you filed, if you had an extension.)
Once you’re gone, you won’t care if your previous employer is contacted.
You’re an employer and you’re really mad about your workers learning about this. What can you do?
Honestly? Get with the program. It’s time to look at your team of workers and put the employees on payroll. Don’t worry about an IRS audit. If you take this step before your workers turn you in, there is a very generous amnesty program for employers. It’s called the Voluntary Worker Classification Settlement Program (VCSP). It takes three months to get approved in the program. Employers who are approved receive a guarantee that the IRS will not audit their past payroll activities. And they only have to pay 10% of the payroll taxes they would have paid for the previous year, without any penalties. This is a terrific deal. But it’s only on the table as long as the employers are not under audit. Once the employees file those Forms 8919 and the IRS starts to investigate, it will be too late.
There is no special arrangement with the state employment authorities. But the IRS will not send them any information about the VCSP approval. However, if the employers are audited, the state will be notified.
These tips can help both labor and management deal with the burdens of payroll taxes a bit more fairly. Perhaps it’s time to come to a meeting of the minds.
Form SS-8
Schedule C
Form 8919
