Taxpayer asks:
Hi Kelly,
Here is the situation i worked for a doctor’s office for two months and she informed me that I did not need to pay taxes because I was a temp. Ten months after I left the job she started asking me for my information because she said the tax laws have changed and she has to with hold taxes from me. Not knowing what to do I ignored her, and later on that month she sent me a 1040. I took this to the accountant and I paid the taxes that was needed to the IRS and the State of California. My questions is are there going to be any repercussions on my part since I’m technically not a independent contractor? And Is what she did legal?
Thanks,
Taxgirl says:
I’m not exactly sure what happened in your situation – withholding is something that happens for employees, generally, but not independent contractors. And the rules didn’t change with respect to how those are governed – perhaps your employer’s understanding of the rules changed?
The bottom line is that your employer should have treated you as an employee if you were an employee, even if you were only there for a brief period of time. You can be an employee even if you only work one day – generally speaking, whether or not you are an employee or independent contractor is not governed by the amount of time that you work, but by a combination of factors.
Factors to be considered can be found both in common law and in Revenue Ruling 87-41. They include:
- Are you subject to the employer’s instructions?
- Does the employer provide training?
- Do you personally perform the services?
- Is the employer responsible for hiring, supervising and paying assistants?
- Is there an ongoing relationship?
- Does the employer determine when you work?
- Is full-time work required?
- Do you work on the employer’s premises?
- Are oral or written reports required?
- Does the employer pay the majority of business and/or traveling expenses?
- Is the employer responsible for the furnishing of tools and materials?
- Are you free from risk or significant investment with respect to the work being performed?
- Are you working solely for the employer?
- Have you stopped offering your services to the general public?
- Can you be fired for any reason (as opposed to contractually bound to perform services)?
While each of these factors really depends on your personal facts and circumstances, the more times that you can say “yes” to the those questions, the more likely it is that you’re an employee.
Don’t assume that you’re an independent contractor because the employer says so – or because you’re merely part time or temporary. Remember, it’s a set of circumstances, not a magic question. There is no such rule that says that only full time, long term workers can be classified as employees. If you have any questions about your status, ask. And if you don’t agree with the answer, talk to a tax professional.
In your particular case, so long as you’re square now, I wouldn’t waste anymore energy on what happened. It sounds as if your employer was confused and fixed it halfway through the term of your employment. So long as your accountant felt like it was resolved appropriately, I would simply move on and not spend another minute worrying about it.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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Taxpayer asks:
I was working as an independent contractor in this small company. At that time, I was getting paid with no taxes being withheld. I assumed I was getting paid under the table, but 6 months after I stopped working there I received a phone call from them asking for my SSN. I did not give them my SSN.
Also, during the time I was working for them I was collecting unemployment insurance and since no taxes were being withheld I was declaring I was not working so I could keep collecting EDD money.
Do I have any rights to withhold my SSN after 6 months not working for them. I’m afraid if I do give them my SSN and didnt declare this income I will get penalized for not declaring income to EDD.
Any advice for me?
Taxgirl says:
It’s important to remember that your employer is not your friend. An employer who suggests that you might be paid “under the table” is definitely not your friend, for about a million reasons.
No matter how many times an employer thinks it might be cheaper to pay you under the table, it’s not. An employer’s share of taxes attributable to an employer is ultimately much smaller than the share of taxes attributable to an employee. Additionally, wages paid to employees and independent contractor are also deductible as a business expense. So, from a financial perspective, it makes more sense for an employer to report wages paid – even if they implied to you that they wouldn’t – not to mention that it’s, you know, illegal. There are all kinds of nasty things that can happen to an employer if they don’t report you properly and then you get laid off, injured, or become spiteful.
That said, just because you weren’t having taxes withheld does not mean that they were paying you under the table. If you were, in fact, properly classified as an independent contractor (and not an employee), the employer would not have been required to withhold taxes. It may have been their intention all along to claim you and they just weren’t terribly organized… Nonetheless, the employer should have clearly indicated to you the terms of your employment, including how you would be classified and paid. You should have also been asked to complete a federal form W-4 (for an employee) or a federal form W-9 (for an independent contractor).
It sounds like that didn’t happen. But now, it sounds as if they’re trying to do things on the up and up, and they want to issue you a form 1099 reporting your compensation. Your refusal to turn over your Social Security number won’t prevent them from reporting your compensation to the IRS. Most likely, they will write “REFUSED” in the space where your Social Security number should go and send it to the IRS.
You will be subject to a fine for not providing your Social Security number for purposes of the form 1099. The biggest issue here isn’t so much the fine but the fact that you’re going to open your tax return up for scrutiny. The IRS will receive a form 1099 with your name on it. If you don’t report the compensation associated with that form 1099, your tax return will likely be flagged for review. If you haven’t reported your compensation, you will be responsible for the taxes associated with the income as well as penalties and interest.
As for your unemployment compensation issue, that gets tricky. Unemployment compensation is paid out of funds which are pooled from federal unemployment and state unemployment taxes and insurance. Cheating, by claiming unemployment compensation when you are working, actually drives up the costs of business for your former employer (trust me, I run a business) since the employer’s rates are affected by your claim. Additionally, since unemployment benefits are being strained right now, many states, like New York and Utah, are aggressively pursuing fraud claims. If you are caught accepting unemployment compensation while you are actually working, you could be prosecuted. Most states will require that you repay the overage plus a substantial fine. You could be required to perform community service, be placed on probation and in some cases, you could be jailed. You could be also disqualified from further benefits for a period of time.
On the tax side, I always advise compliance. In your case, you are required by law to produce your Social Security number to your former employer and properly report the income on your taxes. I would suggest that you immediately contact an lawyer that focuses on unemployment compensation and get some good legal advice about your repayment and reporting options on the UC side. You don’t want to make a bad situation worse. Good luck!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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Taxpayer asks:
I think this should be an easy question for you… are monetary gifts ($250) given to employee spouses taxable as W-2 wages to the employee?
Taxgirl says:
Au contraire. This one feels like it should be easy but it isn’t. And the reason it’s not easy is because I am fairly certain that I have the answer but I can’t find any official documentation to back me up.
So here you go… My answer is yes. As I pointed out in a prior post regarding holiday gifts, the general idea of a gift is that you’re making it out of “love and affection” without any expectations. When your employer makes a gift to your spouse, there is an expectation. If you weren’t around as the employee, that gift would never have been made. So it seems to me that it’s really a gift to the employee and not to the spouse – the idea is to keep the employee happy (which as any good spouse knows only happens when the spouse is happy).
That said, while there are clear attribution rules for spouses and family members with respect to stock ownership and other areas of tax law such as travel and entertainment, I can’t find anything that clearly states that the rules are the same here. Anyone?
(Psst, in the interest of disclosure, this question was submitted by a colleague and not originally as an “ask the taxgirl” question. But hey, it’s my blog and I’ll post if I want to.)
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
I was honored to find that one of my articles for the Legal Intelligencer was posted on law.com. You can read the piece, which focuses on tax issues related to holiday gifts and bonuses for employees, by clicking here.
