The $19 lesson
Every year when tax time rolls around, questions start popping up about being paid as an independent contractor. Another one showed up over the weekend on a closed Facebook forum: “Are dentists allowed to 1099 us for working one shift in their office. Not under a temp agency. TIA.”
The emotional tone in electronic communications is usually flat but Lily Scott’s angst came through loud and clear. In 2018 she worked one temp day at a local office. On Saturday, she received a 1099 reporting the $271 she earned that day. Lily Scott was distressed and was trying to figure out what to do.
IRS rules 101
Despite what one may hear, the IRS requires all income be reported. There are no ifs, ands, or buts—all compensation has to be reported. If an employee is paid as a contractor, then the contractor assumes the entire 15% tax burden, in addition to forgoing other employee protections. The IRS requires businesses to issue a 1099 to any contract worker who earns more than $600 a year. The tax burden for an employee who receives a W-2 is significantly lower for the worker since the employer is required to match the Social Security and Medicare contributions.
Why is this an issue? Some dentist employers misclassify dental hygienists as contractors. This practice has been going on for decades but is illegal in nearly every situation. This ploy is frequently used when a dental hygienist works as a temporary, filling in for the regular hygienist or helping an office deal with a heavy schedule. Typically, these are short assignments, but a growing number of offices are reclassifying regular employees, either full or part time, as independent contractors. More and more dental hygienists are being told during the interview process that they will be hired as a contractor, not as an employee.
Sometimes, the employer will claim their accountant has determined it is OK to pay a dental hygienist as a contractor, but the IRS definition of an independent contractor is very clear and specific. It is quite rare that a dental hygienist would qualify under the IRS guidelines as a contractor.
Misclassification is getting attention
Misclassifying employees is illegal, but until recently, the issue was rarely pursued. The IRS’s goal was to simply collect the taxes from whomever was willing to pay. But times have changed. Many more workers, in all sectors of the economy, are now being hired as contractors, a practice that shifts the tax burden to the worker, and in turn reduces the employee costs by an estimated 30%.
This is even more distressing when a dental office changes the status of the dental hygienist from being an employee to an independent contractor. If there is no actual increase in wages, the dental hygienist just got a huge pay cut, and is no longer eligible for employee benefits like worker’s compensation, unemployment insurance, or paid overtime. These hygienists just lost all worker protection provided on a state and federal level.
The IRS is now putting a spotlight on these activities. Filing an SS8 form puts the IRS on notice that a worker may have been misclassified. A file will be opened and eventually the IRS will make a ruling. If the IRS determines that the employee has been misclassified, the employer will be required to pay all back taxes, fines, and penalties for late payment.
States are joining the effort to properly classify workers as well. And the states and the IRS are sharing information, so it will be harder and harder these practices to continue in the future. There are dentists around the country who are now being held accountable for their actions, and their business practices are being followed more closely on both a state and federal level.
Choices
Lily Scott is faced with a number of choices. Option one: The IRS is aware of the wages she earned, so failing to report the wages is not only illegal, it can put her under the spotlight. Failing to report the income can also have consequences when filing state income taxes.
Option two: Report the $271 on the tax return. Lily is now accepting responsibility for the entire tax burden which is now over 15%. There is no employer matching FICA and Medicare contributions in this scenario. In Lily’s case the additional taxes will be around $19.00 for this single event. IRS Form 8919 determines the amount one owes in Social Security and Medicare taxes when a misclassified employee is paid as a contractor. The amount owed to Social Security is credited to the employee’s record.
Option three: Contact the dental office and request a W-2. Include the IRS definitions of a contractor and a completed W-4 form for their records. It is wise to either hand deliver the request to the office or send the information using certified mail, return receipt requested. There is no way to verify the office received the information if the request is sent by text or email.
Option four: File an SS8 form with the IRS declaring an employee misclassification and contact the state labor board for clarification. Many labor boards and work force commissions are taking a dim view of these practices. Starting at the state level may prove to be a more rapid pathway to a complete resolution.
Filing an SS8 is the “ideal” way to go. Requesting a reclassification adds another layer to the tax return process. If you are considering this route, get in line. Even though the IRS is now cracking down on these employee abuses, your return could be stalled until this is cleared up. Including IRS form 8919 in your tax return is the most correct way to determine the employee tax rate. The article from TurboTax listed below clearly states the terms when the Form 8919 should be used.
Is it worth it to quibble over a $271 wrongful classification? A purist might think so, but the pragmatist would argue to pay the additional $19 this one time. Learn your lesson and never, ever allow an employer to misclassify you again. If the misclassification involved a different level of wages, like $2,710 or even worse, $27,100, then filing an SS8 form is a smart. These are serious dollars and a misclassification at this level is a serious abuse of the system. In the end, the IRS taxes have to be paid by someone. And as more and more misclassified workers report these abuses, employers will be on notice that paying an employee as a contractor will have consequences.
Solutions and suggestions
While we are dental hygienists and not tax experts, it’s a good idea to understand the basic tax rules. Young adults need this information before they ever enter the workforce. Learning the rules from the school of hard knocks is painful. Some dental hygiene programs include this information in their curriculum, but dental hygienists who graduated decades ago may not be familiar with the hazards of being misclassified. Some states, like California, have very robust regulations on worker rights. It is important to know where you stand.
If we really want to stop unfair labor practices, every student in every dental hygiene program should have this information before they graduate. And every dental hygiene association could make a plan to get the word out to their colleagues. This would be a much better use of our energy and time.
My advice to Lily is either report the $271, pay the additional taxes, learn from this situation, inform all of her friends, and move on. Or file her return using form 8919. This is a one-day episode, and the worst-case scenario is a $19 loss to Lily’s bank account. Yes, the 1099 misclassification was illegal, but Lily never, ever has to work like that again. In the end, Lily quipped, “And darn it, that 19 dollars was my Dunkin Donuts cash for two weeks of coffees!!!! Lol lesson learned.” The final lesson, when it comes to tax matters, seek the advice of a qualified tax professional.
It is sad to see these situations continue, but these dirty tricks have been going on for decades. Here is the silver lining. The online discussion sparked another article and colleagues are getting smarter. Lily’s lesson is like getting a traffic ticket for speeding. No one was seriously harmed, and she got an important life lesson. We have to know how and when to pick our battles.
Author's note: Special thanks to Denise N. Hammond, MBA, and Jessica Webb, CPA, for reviewing this manuscript.
Additional reading
Independent contractor? Or employee? https://www.irs.gov/pub/irs-pdf/p1779.pdf. Accessed January 14, 2019.
1099’s and W-2’s: If your boss broke the law, it might make your taxes higher. nelp.org/blog/1099s-w-2s-boss-broke-law-might-make-taxes-higher. Accessed January 14, 2019.
FAQs - 1099 MISC, independent contractors, and self employed. irs.gov/faqs/interest-dividends-other-types-of-income/1099-misc-independent-contractors-and-self-employed/1099-misc-independent-contractors-and-self-employed-1. Accessed January 14, 2019.
Tax Information Center: IRS : Audits and tax notices. Form SS-8, Determination of worker status. hrblock.com/tax-center/irs/audits-and-tax-notices/tax-dictionary-form-ss-8-determination-of-worker-status/. Accessed January 14, 2019.
SS8 – Determination of worker status for purposes of federal employment taxes and income tax withholding. https://www.irs.gov/pub/irs-pdf/fss8.pdf. Accessed January 14, 2019.
What is Form 8919: Uncollected Social Security and Medicare tax on wages. https://turbotax.intuit.com/tax-tips/small-business-taxes/what-is-form-8919-uncollected-social-security-and-medicare-tax-on-wages/L53H40rgu. Accessed January 14, 2019.
