Expert: Shirley McAllister, CPP, PHR - 1/25/2010

Question
QUESTION: Here's a scenario:  Since the beginning of employment, an individual had been paid as an "employee".  At the end of the year, the employee received a W-2 AND a 1099 from his employer.  Perplexed, the employee questioned the employer and the employee was notified that during the last quarter the employer changed the employee's status from receiving W-2 income (in which all federal, local and state taxes were withheld) to a 1099 (not withholding any taxes).  There was no notification of such action or any oral or written consent.  The amount of the hand written checks the employee began receiving did not include any detail tax breakout, yet was the same amount as the net of the previous actual paychecks that did include tax breakouts.  Do you have any advice on behalf of the employee now that he will owe X amount of dollars back to the Federal Government?  Does the employee have any legal ground to recoup the lost wages?  Does the employer have the right to change this status without any notification or consent and is the employer in any violation of payroll tax laws?  Thank you!

ANSWER: This is illegal to do and it is a try by the company to avoid paying payroll taxes. You need to contact your local Department of Labor right away.

Shirley

---------- FOLLOW-UP ----------

QUESTION: Thank you Shirley for confirming my suspicion.  Is the employee liable for the payroll taxes since October and do you believe he should contact an attorney to recoup any losses?  

Answer
I think you could probably consult an attorney but since it is only 3 months the taxes would be minimal with what was withheld for the entire year. I am not sure what you would recoup would pay for the attorney fees. You recieved gross pay so you did recieve that amount including the taxes so in actuality you were not cheated out of anything. Instead of taxes being taken out they were actually paid to you on the gross amount.

I would file the way it is and you should be okay.

Shirley