Expert: Don Sadler - 7/9/2008

Question
My husband is an actual employee (according to the IRS) but was treated as a sub contractor for 1 year.  The IRS sent us a large bill for "Self Emp" taxes.
We're currently completing the SS-8 form.  But my husband is afraid that his boss will be contacted & have to pay past payroll atxes & he will then lose his job.  Will his boss be audited or contacted to pay those past payroll taxes?

Answer
As it says in my profile, I am not a tax expert so if you accept that as a caveat, here is my response to you.

If your husband was treated as a contractor, he received a 1099 instead of a W-2 [note: IRS also receives a copy of the 1099 from the employer].  As a contractor (irrespective of whether it is an accurate classification) you are supposed to pay estimated taxes quarterly during the year and when you file taxes, you should file a schedule C (business).  Your self-employment taxes (FICA - social security) are calculated on that form and merge into your other tax info on the 1040.  If you have not been doing this, then the IRS will certainly assess self employment tax.  They may or may not contact the employer depending on the industry and other factors.

If they do contact the employer then the employer will have to defend the decision to classify your husband as a contractor instead of an employee.  If the employer cannot defend that classification, then the employer will be assessed back taxes (FICA) and be required to withhold FICA and other incomes tax, as appropriate, in the future.

If YOU make a determination to the IRS (with the SS-8) that you should be an employee, then the IRS will likely contact the employer to change your status and require future withholding and back taxes.

It is unlikely that the IRS would launch an audit for a single person who is misclassified but if this happened with several people working at the same place, then the IRS might do an audit as they would realize this is a business owner attempting to avoid taxes and probably denying other benefits to the employees.

How will this affect you? In the worst case, it could put the employer out of business if they cannot meet the cash demands of the taxes - so your husband may be out of a job.  I cannot imagine that he would be fired because the IRS insists he is an employee vs. a contractor.  If he was fired, I think you would have a very good cause for legal action against the employer.

here is some IRS info for you:

http://snurl.com/con-emp