Disclaimer: The information provided in this article does not, and is not intended to, constitute legal or tax advice; instead, all information is for general information purposes only. This article contains links to both governmental and third-party websites Such links are only for the convenience of the reader. Readers should contact their attorney, CPA, or qualified tax preparation specialist to obtain advice regarding any personal legal or tax matter.
The following conversation is intended to alert dental health care workers about employment practices that can lead to worker misclassification.
“I worked as a temp in several offices last year covering maternity and surgery leaves. The offices paid me as an independent contractor. I just found out I am now facing a huge income tax bill. Do I have any recourse? I don’t have that kind of money. I am scared.”
Social media forums are full of chatter about worker classification issues. The frequency and range of questions always increases as the tax season rolls around. There are many things to take into consideration when faced with a dilemma like this.
Understanding the “why” sets the framework for an effective discussion on exactly why classification issues are so important to all parties involved.
The first, and perhaps the most obvious, is to never agree to work as an independent contractor either verbally or in writing. This advice even applies to a temporary position. Before addressing potential solutions, here is some basic information about the risks of being classified as an independent contractor.
Being paid as an independent contractor is fraught with issues. One of the most egregious outcomes is that the worker is now assuming the entire Social Security and Medicare tax burden (also known FICA, the Federal Insurance Contributions Act) for all dollars earned, in addition to paying all of the federal income tax on the earnings. There are no matching payments by the business since the worker is not classified as an employee.1,2
Independent contractors are paid income by a business, but no taxes are taken out. A worker fills who fills out a W-9 form at the beginning of a work term is now paid as an independent contractor. If the worker’s income exceeds $600 in the year from any one business, the income is then reported to the IRS at the end of the year via a Form 1099. The worker should receive a copy of the 1099 at the end of the work year. If the total worker income from a business is less than $600, the business is not required to provide the worker with a 1099. Workers, however, are required to report all wages on their federal tax return, whether a 1099 is issued or not. Independent contractors need to keep meticulous records regarding all wages.3
Some mistakenly believe that a temporary worker is automatically an independent contractor, but it is extremely rare for a clinical dental hygienist to qualify as such. The IRS has published guidelines on how to classify workers, and classification is based on a number of factors. In the past, the IRS used a 20-factor test to help guide employers regarding worker classification. The new classification guidelines have condensed the factors into three areas:
- the ability of the business owner to control the behavior of the worker,
- the type of financial control over the worker, and
- the relationship between the worker and the business.
The burden of proof regarding accurate worker classification is the responsibility of the business, and the IRS assumes a worker is an employee unless proven otherwise.2,4
States all over the nation are also weighing in on the conversation about worker classification. To add to the confusion, the federal Department of Labor guidelines to determine if a worker is an employee is not identical to the IRS classification, and individual state labor laws are all over the map. Independent contractors are not eligible for employee benefits such as worker’s compensation and unemployment insurance. These benefits are administered by state labor boards and fall under federal Department of Labor employee guidelines.5,6 Misclassified workers also do not receive wage protection and overtime pay.
More and more states are taking action against businesses that are misclassifying workers.6 Actions are being taken by state labor boards, professional organizations, state attorney generals, and task forces in a number of states including North Carolina, New Jersey, Massachusetts, and Virginia.
Now more than ever it is critical for a worker to take an active role in understanding their worker rights.
References
- Employee misclassification. National Conference of State Legislatures website. http://www.ncsl.org/research/labor-and-employment/employee-misclassification-resources.aspx. Accessed December 26, 2019.
- Murray J. How the IRS determines independent contractor status. The Balance Small Business Website. https://www.thebalancesmb.com/how-the-irs-determines-independent-contractor-status-398618. Updated March 14, 2019. Accessed December 26, 2019.
- Murray J. How to report and pay independent contractor taxes. The Balance Small Business website. https://www.thebalancesmb.com/how-to-report-and-pay-independent-contractor-taxes-398907. Updated April 3, 2019. Accessed December 30, 2019.
- Independent contractor (self-employed) or employee? Internal Revenue Service website. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. Accessed December 26, 2019.
- US Treasury Inspector General for Tax Administration Office of Inspections and Evaluations. Additional actions are needed to make the worker misclassification initiative with the department of labor a success. Reference Number: 2018-IE-R002. https://www.treasury.gov/tigta/iereports/2018reports/2018IER002fr.pdf. Published February 20, 2018. Accessed December 26, 2019.
- United States Department of Labor Wage and Hour Division. Get the facts on misclassification under the Fair Labor Standards Act. https://www.dol.gov/whd/workers/Misclassification/misclassification-facts.pdf. Accessed December 26, 2019.
- State labor offices. United States Department of Labor website. https://www.dol.gov/agencies/whd/state/contacts. Accessed December 26, 2019.
- Department of the Treasury Internal Revenue Service. Form SS-8. https://www.irs.gov/pub/irs-pdf/fss8.pdf. Revised May 2014. Accessed December 26, 2019.
- Department of the Treasury Internal Revenue Service. Instructions for Form SS-8. https://www.irs.gov/pub/irs-pdf/iss8.pdf. Accessed December 26, 2019.
- Form 1099-Misc & independent contractors. IRS website. https://www.irs.gov/faqs/small-business-self-employed-other-business/form-1099-misc-independent-contractors. Updated September 20, 2019. Accessed December 26, 2019.
Anne Nugent Guignon, MPH, RDH, CSP, provides popular programs, including topics on biofilms, power driven scaling, ergonomics, hypersensitivity, and remineralization. Recipient of the 2004 Mentor of the Year Award and the 2009 ADHA Irene Newman Award, Anne has practiced clinical dental hygiene in Houston since 1971, and can be contacted at [email protected].
