CashoutGlossary / Misclassification
Misclassification
When a business treats a worker who is legally an employee as an independent contractor, which can cost the worker minimum wage, overtime and tax savings.
Misclassification is when a business treats someone who is legally its employee as an independent contractor. The Department of Labor says misclassified workers may not receive the minimum wage and overtime pay they're entitled to under the FLSA, and may lose other benefits and protections.
It costs you in taxes too. An employer and an employee each pay 6.2 percent for Social Security and 1.45 percent for Medicare. A contractor pays both halves, 12.4 percent and 2.9 percent, as self-employment tax.
The label isn't the test. Under the FLSA, a worker may be an employee regardless of the title or label they're given, and getting a 1099 doesn't make you a contractor. The IRS weighs behavioral control, financial control and the type of relationship. Some states, including California and Massachusetts, use a stricter ABC test.
What you can do:
- Ask the IRS to decide your status with Form SS-8. You or the business can file it, and the IRS says a determination may take at least six months.
- If you were an employee treated as a contractor, Form 8919 lets you figure and report only your share of Social Security and Medicare on that pay. One situation it covers is getting both a W-2 and a 1099 from the same firm when the 1099 amount should have been on the W-2.
- For unpaid minimum wage or overtime, contact the Department of Labor's Wage and Hour Division or your state labor department.
Related terms
Independent contractor · ABC test · Fair Labor Standards Act (FLSA) · Self-employment tax · Department of Labor (DOL)
