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Question: I was hired at a very small company where I am the only employee, working for the owner. Although I was hired as a “full-time” employee and work from the office 40 hours a week, I am paid as a permalancer, and I invoice my boss every two weeks. I receive a check with no taxes withheld. My boss does not offer health insurance, so he pays me an additional monthly stipend to cover my insurance costs. I also use my own laptop for work, as there is no company laptop available. The only tax form I have submitted is a W-9.
According to my boss, the reason for this arrangement is that he doesn’t want to incur additional tax costs by putting me on payroll. It seems to me that if I am invoicing as a freelancer, I should be the one setting my rates. My boss counters that since he tells me when and where to show up to work, I am essentially a full-time employee, not a freelancer.
To cap it off, when I was hired, we agreed that I would make a lower weekly rate for the first three months as a trial and then have a salary review and projected pay increase afterwards. This review is now imminent and my boss has already intimated that the company doesn’t have the business it needs right now to give me a raise.
Could you please give me some advice on what I should do to clear up my murky employment status, how to ask for more money in my situation and how best to speak with my boss about it? Thank you so much!
Nick Corcodilos: You should consult an attorney for detailed advice about your specific situation, but it seems pretty clear that you and your boss are in violation of U.S. tax regulations.
It also seems that your boss knows better and that he’s a double-talker. When it’s to his benefit to treat you like an independent contractor, he does so. When he wants control over you, he treats you like an employee. He can’t have it both ways.
Please check the IRS website to determine whether you are an independent contractor (self-employed) or an employee. I prefer the IRS test published by the state of Oregon.
In general, you’re an employee if your boss controls how, where and when you do your work as well as how much you are paid. Here’s why I think you fit the IRS definition of an employee — no matter how your boss pays you.
- You work full time for him, not just during hours you assign for yourself.
- You do not work for anyone else, thus you’re not running your own consulting business.
- He decides what work results you must deliver, but he also decides how you will do that work — that is, he manages you and your time.
- You’re required to work in his office, while freelancers are free and able to work anywhere they want as long as the work gets done.
- Your boss provides facilities you need to get your work done for him. A contractor uses their own facilities.
- You don’t control how much profit you earn from your work. A contractor does.
- There is no work contract between you. An independent contractor would have a contract.
While your boss requires you to use your own computer and using your own work equipment is the sign of an independent contractor, I think your boss is just taking advantage of you. Most important in all of this is that your boss himself tells you that you are “essentially a full-time employee.” He just doesn’t want to pay payroll taxes as required by law. Perhaps more to the point, you feel like you have to have a “salary review” to get a raise. Independent contractors are not paid salaries!
I’d do one of two things. Either tell your boss you want to be a full-time employee working on a W-2 with taxes properly withheld, or tell him you want to work on your own schedule from wherever you like under a written agreement and a 1099 — and that you will be free to do work for other clients. This will require a negotiation, which will of course involve agreeing on a pay rate. (See “My boss won’t deliver a promised raise.”) I hope the two of you can work it out.
If your boss gets audited by the IRS and they find you are really being treated as an employee under the tax regulations, you could be just as liable as your boss. From what you’ve disclosed, I think your boss knows exactly what he’s doing. A talk with him will either end your work relationship or force him to hire you and put you on his payroll.
Once again, this is my lay opinion based on what you’ve shared. For real legal advice, you need to talk to a lawyer. You could also contact your state’s department of employment and labor and ask their advice. Finally, you could fill out and submit IRS form SS-8 to the IRS itself — and the IRS will make the determination for you.
Dear Readers: Have you ever worked as an employee while being paid as a freelancer or independent contractor? Have you or your employer ever gotten busted for it?
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