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Worker classification changes by employers: impact on individuals

In California, there is a state-specific deadline by which employers must send out 1099 forms to contractors.

As we noted in our January 22 post, 1099s are the counterpart for contractors to the W-2 forms sent to employees.

What happens, however, when an employer reclassifies a worker from a contractor to an employee?

Of course, the IRS has put ample pressure on employers to do this in recent years.

The agency has used both carrots and sticks. For incentives, it has offered a Voluntary Worker Classification Settlement Program (VCSP). But it uses sticks as well, in the form of audits that seek to detect misclassification of employees.

This week, nationally syndicated financial columnist Liz Weston received an inquiry from a reader who said her employer had changed her from a W-2 employee to a 1099 contractor without her knowledge.

The woman to whom this happened did not fill out any paperwork to effectuate this change. She did not even find out about until she received a 1099 form.

Understandably, the woman is concerned about the tax compliance burden posed by being a contractor. After all, contractors do not have taxes withheld from their checks. Instead, they are responsible for making quarterly estimated tax payments.

It may also be difficult to know how to fill out your taxes, if you have both a W-2 and a 1099.

The IRS is aware that individuals can potentially be put in a tax compliance bind when they believe their tax status is one thing and their employer unilaterally changes it to another status. Form SS-8, for example, is designed for explanations by taxpayers about these circumstances.

Source: A$K Liz Weston, "Employee Secretly Reclassified as Contractor," March 10, 2014

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