Misclassified contractors often do not even know that they have been misclassified. You might not have heard any of this terminology before you got hired, and you need to be aware of how businesses can skirt tax rules and save money by calling you a “contractor” instead of an “employee”. You might be shocked by how much the company saves and how much you need to pay because of this simple change in classification.
The Employer Avoids Several Different Taxes Related to Your Employment
When you are misclassified by your employer as a “contractor” instead of an “employee”, they do not need to pay several different taxes. The business is not on the hook for payroll taxes, Social Security taxes, Medicare taxes, and unemployment taxes. Once you stop paying those taxes as an employer, you can save 40-60% on each employee. This is why contractors should ask for more money to make up for the difference.
Employees Do Not Get the Full Hourly Rate
Full “employees” do not get their full hourly rate because taxes are withheld from their paychecks. While this might sound like a problem, the “employee” does not need to worry about paying taxes at the end of the year. This difference is where some people decide they do not want to work as an independent contractor.
But Contractors Do Not Have Taxes Withheld
Contractors do not have taxes withheld, and their employers do not pay a portion of their payroll taxes. You need to save up for all the taxes that were not withheld during the year, and you are not getting help from anyone. At best, you need to take more deductions during the year because you might work from home, claim other expenses, and keep records of everything you spent for work.
You Report Income for Taxes Even if You are Paid in Cash
Even if you are paid in cash as a contractor, you must report your income. Your employer might not report your income if you are a contractor, but that income should be accounted for either way. This is another burden that contractors have that “employees” do not.
You May Need to Contact the IRS
Contact the IRS if you believe you have been maliciously misclassified. This is very important because you do not want your employer to get away with this if you thought they were helping pay your taxes during the year. At the very least, have an employment lawyer read over your contract before you sign.
Be Careful When You Take A New Job
You should be careful when taking a new job. You need to know if you are classified as an “employee” or a “contractor”. Some people love being a contractor because they can set their own hours and manage quarterly tax payments. Others need to be on a W-2 so that their employer will help them with taxes during the year, they have job security, and they get closer to a refund at the end of the year.