I was hired as a graphic designer at a locally owned stationery store in California about a month and a half ago. From the start I knew something was kind of strange, as I was hired for full time but never signed a contract, and all my payments were given to me as untaxed checks.

At first I assumed I was being paid under the table, but when I was asking about taking Christmas off to see my family a comment from my boss raised a red flag: "I hire you as a contractor, so I'm not obligated to give you holiday time off."

I then did some research (and confirmed that my boss does indeed report our incomes), and found out that employers misclassifying employees as contractors is something that is done, often intentionally to avoid offering benefits and paying half of ss/medicare taxes.

I definitely should be classified as an employee, as:

  1. my boss manages when and where I work,
  2. all of the equipment and supplies I need to work are provided to me in-house, and
  3. I get paid hourly and work 40 hours a week.

This is obviously a bad situation for me, but it's also fraud if my boss is doing it intentionally. Is there anything I can really do about it? Is this a common thing? I'm really unsure how to handle it but I do feel like I'm being taken advantage of.

So far my only game plan is to talk to the store's accountant, as my boss has not been transparent about exactly how my income is reported and what I need to do to prepare my taxes.

TL;DR: I believe I'm being intentionally misclassified as a contractor and I'm unsure of what to do about it. Do I find another job? Do I file an SS-8? I need to know what to do about this.

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    Comments are not for extended discussion; this conversation has been moved to chat. – Jane S Oct 16 at 23:39
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    What did you do to address the fact you thought you were being employed/paid illegally before you were told you're a contractor? – jpmc26 Oct 17 at 23:56

It is perfectly fine to be hired as a contractor, provided that (a) you are treated as a contractor, not an employee (basically: nobody can tell you what to do, and you can at any time get a replacement to do your work), and the payment is adjusted (my rule of thumb is that as a contractor, your daily rate should be about the same as 1/150th of an employee's annual salary before taxes).

What you do: You tell your employer that you are not a contractor. So he should pay your back taxes, make insurance payments as required, and give you your holidays. If he wants you to continue as a contractor, then calculate your daily rate according to my rule of thumb (if you thought your annual salary before taxes should be $60,000, then your daily rate should be $400).

If he says that there is no contract showing you are an employee, then you tell him there is no contract showing you are a contractor, so legally there is an unwritten contract with the most likely usual terms, and that is that you are an employee. You didn't send him a bill, right? They just paid? If you are a contractor, you send a bill and the bill gets paid. They paid you without receiving a bill, therefore you are an employee. You should also have discussed your annual pay. Employees have an annual pay (and get 1/12th every month), contractors have a daily rate. If you never discussed a daily rate, any court will say you are an employee. You might also send a friend in to do your job for a day. As a contractor, you have the right to do that. See what your boss thinks about that.

If you end up financially damaged, you can always take revenge by calling the tax authorities, telling them that you have been employed and you fear that no income taxes have been paid on your behalf. I don't know where you are, but all tax authorities that I know of take this very, very seriously. Because not paying income taxes on your behalf is actually stealing from you.

Obviously you should be looking for a job elsewhere. The company is run by crooks, and you never want to work for a company run by crooks.

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    Comments are not for extended discussion; this conversation has been moved to chat. – Snow Oct 17 at 9:02
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    @DarkMatter - Daily vs Annual - I would hope for at most x150 – Greenonline Oct 17 at 19:57
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    As written a contractor makes in a day an half what an employee makes in a year. I feel like that is not what you meant. – Rad80 Oct 18 at 7:20
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    @Hocus was nice enough to restore my original "150 times" from the incorrect edit to "150%". – gnasher729 Oct 18 at 12:56
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    OK, a lot of people seem to be getting confused by the "150 times" thing. Maybe that passage should be rewritten to something like "your daily rate should be about 1/150 of an employee's annual salary before taxes". I'd suggest that edit myself, but I can't since there's apparently another suggested edit pending at the moment. – Ilmari Karonen Oct 19 at 9:30

Bring this question to a lawyer.

If you believe that any laws have been broken, simply quitting could get legally messy since it is unclear what your employment classification is. A labor attorney would do a much better job of explaining what your options are in this situation than we ever could.

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    At first glance, this doesn't seem like an answer to the question. But it is. Specific legal advice is off-topic even on law.stackexchange.com, much less here on workplace.stackexchange.com. Even if the person posting an answer were a lawyer, they wouldn't be the OP's lawyer. :-) – T.J. Crowder Oct 16 at 13:28
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    @T.J.Crowder If you believe that a question is off-topic, the procedure is to flag it as such, or vote to close if you have the privilege to do so. An answer saying that something is off-topic is a contradiction. – pipe Oct 16 at 13:40
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    @pipe - Quite. It probably should be a comment accompanied by a close vote (for those who are able to VTC). – T.J. Crowder Oct 16 at 13:48
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    @pipe I think there's a difference between a question asking for legal advice (which is off-topic), and a question asking for advice where the answer is to get a lawyer. I think that the situation in the question could possibly not need to involve lawyering up, but it's worth considering that the OP needs to be careful what they do without one. – IllusiveBrian Oct 16 at 18:40
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    @Bilkokuya - disagree. TLDR in the q is: "I believe I'm being intentionally misclassified as a contractor and I'm unsure of what to do about it. Do I find another job? Do I file an SS-8? I need to know what to do about this." - SEE A LAWYER ASAP is in my opinion the only correct answer (caps very much intentional!). The OP is in dangerous territory legally, and discussing this with their boss will likely only impact them negatively. At the very least they should be discussing their options with an accountant who will likely tell them to speak to a lawyer. – Miller86 Oct 17 at 13:14

if they are paying you with a check they aren't paying you under the table. They use a check when they want a paper trail, they use cash when they don't want to a paper trail.

If they were classifying you as a employee they would have had you complete a W-4 (both Federal and the state version). If they are planning on having work as a contractor they should have had you complete a W-9 form, though the W-9 doesn't have to be completed in the first few days of work.

Because your checks are for hours * rate, with no taxes taken out, you know they are paying you as a contractor.

The accountant isn't going to be much help. Depending on their exact role they may be just keeping the books, or they may be providing advice.

Looking through the state of California website it also appears that California requires contractors to file paperwork to register with the state. That may be your next steps. You don't want to be a contractor, but the state requires you to complete the paperwork. There may be an opportunity there to get your classification corrected.

Regarding employee or contractor:

Q. What can I do if I believe my employer has misclassified me as an independent contractor and as a result am not being paid any overtime?

A. You can either file a wage claim with the Division of Labor Standards Enforcement (the Labor Commissioner's Office), or you can file an action in court to recover the lost overtime premiums. In both situations, it will first be necessary to determine your employment status, that is, employee or independent contractor, before the issue of overtime can be addressed and decided. Additionally, if it is determined that you are an employee and you no longer work for this employer, you can make a claim for the waiting time penalty pursuant to Labor Code Section 203. Eligibility for this penalty is dependent upon your employment status, as independent contractors are ineligible for the waiting time penalty.

Yes this FAQ item mentions overtime, but the rest of the FAQ makes it clear that overtime is just one reason employers want to call an employee a contractor.

Unless this is a brand new company, and your boss has no clue about labor laws and taxes, your long term prospects with this company are limited. You have no idea where else they are cutting corners. I would start looking for another job.

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    I think "if he treats you like a contractor, then fill out state paperwork to be a contractor" is bad advice. The employer is treating OP like an independent contractor in all the ways that benefit them (not withholding taxes, not paying benefits, not offering paid vacation), while at the same time treating OP like an employee in all the ways that benefits them (requiring specific hours, etc.). I doubt "I'll stop showing up for my scheduled shifts because I'm an independent contractor" will fly here. I do agree with your final line, *start looking for another job". – BradC Oct 16 at 16:06

The IRS and the federal Department of Labor have a number of good resources about this problem. It's a predicament that has become fairly common, unfortunately, but it's definitely one you can work through so I wouldn't recommend leaving the job simply due to a potential misclassification.

Given the information that you provided, the IRS may consider you a "statutory employee" (which can happen even if your employer considers you a contractor). See this IRS page for details about their various classifications and the tax implications of each.

The Department of Labor looks at it from the point of view of a law called the Fair Labor Standards Act (FLSA). The contractor-vs-employee issue has been the subject of a number of court cases, and the DoL's Fact Sheet 13 lists some of the factors that courts consider "significant" when making this determination.

For a high-level summary in fact-sheet form, see the DoL's infographic or the IRS's Publication 1779.

Your tax liabilities as an employee are very different than as a contractor, so getting an official determination might be your best course of action. Filing form SS-8 with the IRS is the only way I'm aware of to get an absolutely official answer. This process is advertised as taking ~6 months to complete, so it would be best to get the process started soon in hopes it will be complete before tax returns are due in April.

I recommend that until this issue is resolved, do not attempt to do your own income tax returns. Have an accountant review your information and ensure that everything gets filed correctly (standard income/FICA taxes vs. self-employment taxes). You may need to file Form 8919, which is designed for people misclassified as contractors to ensure that their taxes get credited to their Social Security record properly. Filing incorrectly can lead to a huge hassle and expense to correct it later on, so it's safer to get it right the first time, even if it costs a little more up front.

All this is written with respect to federal taxes. Any state-level tax rules that California imposes are actually completely separate issues. You can actually be classified by California as a contractor and by the IRS as an employee (or vice versa). This can get very complicated very quickly, which is why I recommend that you seek professional tax advice from an accountant that has experience in this sort of thing.

Do your research or hire a tax accountant, fast

Taxation for independent contractors is much more complicated than for employees, and it's clear that you're "out of your depth" here. As an employee you have a sheltered existence because the tax stuff is done automatically for you. As a contractor you have to do it yourself. You must take several actions, on your own, or face fines next April. And April is too late, they require action sooner.

You will find that since your are paying a lot of your own stuff (hiring accountant, your half of FICA, healthcare, etc.) that your effective salary is lower than you were expecting.

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    In my experience, my taxes as an independent contractor weren't much more complicated than my taxes as a regular employee. I did have to fill out another form, but it was straightforward. The pain was estimated taxes, and you may be able to get along without paying them for the first year (the formula to determine underpayment depends on what you made and withheld last year). – David Thornley Oct 17 at 15:12

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