Worker Classification: Employee vs. Independent Contractor
- What is worker classification?
- Why does it matter how I'm classified?
- How can I tell which way I've been classified?
- I think I should be classified as an employee but how do I know?
- What can I do if I think I've been misclassified?
- Are there any other resources?
- What if I haven't received my tax form from my boss?
- How do I find out if I am covered by unemployment and workers' compensation insurance?
- What if I get fired for complaining about misclassification?
When you work for someone, they can classify you as an employee or an independent contractor.
If you are an independent contractor, it is up to you to pay all of your social security and medicare taxes (you might recognize these taxes together as FICA or payroll taxes). These taxes make up 13.3% of your earnings. As an employee, you split these taxes with your employer. That means you pay 5.65% and your employer pays 7.65%. If you're being misclassified, it could be costing you money because you are paying the entire 13.3% on your own.
Also, only employees are eligible for unemployment benefits. That's because a business has to pay unemployment insurance on each employee. But a business does not pay unemployment insurance on independent contractors.
Employees are protected by the Maine Workers' Compensation Act. Workers' compensation pays medical bills and lost wages caused by an injury at work. Independent contractors get no benefits if they are hurt at work.
Classification as an independent contractor instead of an employee causes you to lose other important rights. Minimum hourly wages, overtime pay, and rest break laws do not apply to independent contractors. Laws that protect you from harassment and discrimination based on sex, disability, religion, whistleblowing, and other illegal workplace conduct usually only protect employees. An employee might qualify for Family Medical Leave Act, but an independent contractor never gets Family Medical Leave.
Misclassification affects your entire community. For instance, law-abiding employers face a disadvantage when competing for business. Healthcare costs rise to cover the needs of injured misclassified workers who don't qualify for employer-sponsored health insurance, and public assistance increases when misclassified workers don't qualify for unemployment compensation.
Misclassifying you as an independent contractor saves the company you work for time and money but it hurts you and the rest of your community.
Look at the tax form that your boss issues you at the end of the year. Form W-2 is issued for employees. Form 1099 is issued for independent contractors.
There are several things that you should look at to see if you are an employee or an independent contractor.
- Control over how you do your job: Ask yourself how much control your boss has over how you do your job. Examples would include telling you when and where to work and with what tools, and by offering you training to do your work in a specific way. If your boss has the right to tell you how to do your job, you are likely an employee.
- Control over money: How much control does your boss have over the money it takes to do the job? Does the boss buy tools and equipment? Does the boss pay you for expenses? Are you paid an hourly rate? If so, you are likely an employee. If you pay for your own expenses and are paid a flat rate for the job you are likely an independent contractor. Also, if you are able to advertise your services to other companies, you are you likely an independent contractor.
- Relationship between you and your boss: Look at any contract that you signed. Does it say you are an independent contractor? Even if it does, control over the job and money may prove that you are an employee. You must consider your work relationship as a whole. Are you able to work for other businesses at the same time? Are you allowed to hire your own employees to help with the work? Is your work different than the focus of the business? If so, you are probably an independent contractor. If you work for only one business, cannot hire helpers, and do the same job as others who work for the business, you are likely an employee.
Of course, no one fact proves you are an employee. You have to look at all the facts together.
- First, you can speak to your boss and see if they will review your classification and make any necessary changes. You should tell your boss that you think paying you as an independent contractor is against the law before you contact the IRS, the Department of Labor, or the Workers' Compensation Board.
- If it's not possible to speak to your boss, or if you've already tried to speak to your boss but haven't had any luck, you can ask the IRS to review your case. Request this assistance by submitting Form SS-8. The IRS will consider the three factors listed above. The IRS will also contact your boss to get their version of facts. This is something to take into consideration if you wish to keep your employment. For more information on this topic, please see the last section below. The decision made by the IRS will be binding on both parties. However, the losing party can request a re-examination if they have additional information that wasn't previously considered.
- You can file your tax return along with Form 8919. This form allows you to pay only your portion of the payroll taxes if you believe you have been wrongly classified. You can do this in addition to Form SS-8. If the IRS audits this return and decides that you are not an employee, you can then bring your case to Appeals and eventually Tax Court.
However, you must be able to claim one of the reasons below before you can file
- You filed a Form SS-8 and the IRS has determined that you are an employee.
- You were designated a "section 530 employee" by your boss or the IRS prior to January 1, 1997. A 530 employee is a person the IRS determined to be an employee prior to January 1, 1997 but whose employer has been granted relief from payment of employment taxes.
- You received a letter from the IRS that states you are an employee.
- You were previously treated as an employee by this boss and you are performing services in a substantially similar way and under substantially similar direction and control.
- Your co-workers, performing very similar services under similar direction and control, are treated as employees.
- Your co-workers, performing very similar services under similar direction and control, filed Form SS-8 for this boss and received a determination that they were employees.
- You filed Form SS-8 with the IRS and have not received a reply.
The IRS, Maine Department of Labor, and Maine Workers' Compensation Board all make decisions about whether a worker is an independent contractor or an employee. Each agency will apply its own rules to decide whether your boss should be paying a portion of your FICA taxes, or you qualify for unemployment or should get workers' compensation pay. Your boss does not make the final decision.
If you think you are an employee, contact the IRS, file for unemployment, or make a workers' compensation claim right away. Each agency has time limits, and you can lose valuable benefits if you wait too long.
During tax season it's important that you receive your tax forms on time so you can properly prepare your taxes. If your boss hasn't sent you the form that you need, call 800-829-1040 (IRS hotline). Don't call this number before February 16. The IRS employee that you speak with will fill out a W-2 complaint form and send a copy to you and your boss.
The Maine Department of Labor has investigators who determine worker classification by employers. The Maine DoL can help you with unemployment insurance, wage, and workplace issues. Go here to use the on-line tip report.
For information about Workers' Compensation Insurance Coverage contact the Maine Workers' Compensation Board at (207) 287-7071.
The Maine Whistleblower Protection Act may help. You can bring a whistleblower retaliation claim if you:
- told your boss or a supervisor that paying you as an independent contractor is illegal,
- gave the employer time to fix the misclassification by changing you to an employee and paying back taxes and benefits,
- reported to the IRS, DoL, or Workers' Compensation Board after your employer did not fix the problem, and
- were fired or demoted for complaining about the misclassification.
You must file with the Maine Human Rights Commission within 300 days of being fired or demoted. The Maine Human Rights Commission will investigate. They could help you get your job back - or money to compensate you for being fired or demoted.
You can fill out a Maine Human Rights Commission intake questionnaire. You can call the Commission at (207)624-6290 or TTY 1(888)577-6690 to talk to an intake person.