The misclassification of employees as independent contractors is a persistent problem hurting the poor in Philadelphia.

In our service-driven workforce where the "gig economy" is on the rise, the scourge of worker misclassification is increasingly prevalent. Misclassification occurs when employers erroneously label their workers independent contractors even though these workers are employees whose supervisors control the methods and means of their work. When employers misclassify their workers as independent contractors, workers are deprived of vital rights and benefits they enjoy under various laws, including minimum wage, overtime, and collective bargaining protections. Misclassification also has a harmful impact for workers in their federal tax obligations. When a worker is paid on a Form 1099-MISC, with no taxes withheld, rather than on a Form W-2, the taxpayer is burdened with the full 15.3% self-employment tax. As such, 1099ed workers are saddled with both the employer and the employee shares of Social Security and Medicare taxes.

At Philadelphia Legal Assistance, I assist workers in challenging their misclassification before the IRS through the SS-8 process so that misclassified workers only pay their employee's share of taxes. In my experience thus far, misclassification has been common among home health care workers, staffing agency workers, clerical workers and construction workers, among other industries. In Pennsylvania alone, the National Employment Law Project found that over 580,000 workers are misclassified in a single year. The Temple University Beasley School of Law Sheller Center found in a comprehensive 2015 study on wage theft that up to 9% of workers in Pennsylvania are misclassified.

Through my ABA Tax Section fellowship project, I have sought to redress misclassification through legal representation of low-income taxpayers who seek to dispute their 1099 status. I have so far filed 14 Forms SS-8 on behalf of various Philadelphia taxpayers challenging their misclassification for tax purposes. A four-page package, the Form SS-8 is a vital tool for workers to ensure they only pay the correct amount of tax, a concept that is also a key pillar of the recently codified Taxpayer Bill of Rights. The SS-8 allows a worker to demonstrate why they believe they are an employee as it asks numerous questions related to whether a taxpayer worked under the direction and control of others. The SS-8 focuses on behavioral control, financial control, and the relationship between the parties. By filing an SS-8, a form that is not anonymous, a taxpayer can list their 1099-MISC income as "wages" on their federal tax return. The filing of the SS-8 alone allows a taxpayer to attach a Form 8919, to their Form 1040, that accounts for just their employee's share of uncollected Social Security and Medicare taxes. Then, the SS-8 Unit sends a blank SS-8 to the employer asking them to respond to the worker's attestations.

After an investigation and analysis of the facts, the SS-8 Unit relies on a 20-factor test to determine whether the worker is an employee or an independent contractor. These 20 factors derive from the IRS's reliance on the common law definition of employment and they relate to the questions asked on the SS-8 regarding the "degree of control" in a worker's job. These factors include: training, instruction, and set hours of work, among other indicators of an employer-employee relationship. If the SS-8 Unit determines that a worker is an employee, the worker can utilize this determination, if they have not already adjusted their tax return, to ensure they only pay their employee's share of taxes. Crucially, a taxpayer generally has three years to claim a refund of the employer's share of Social Security and Medicare taxes paid through the self-employment tax.

So far, noticeable trends have emerged in misclassification. Commonly, employers will provide workers with so-called "independent contractor agreements" through which they set the terms and conditions of the worker's job. These agreements though often delve into intricate details regarding the supervision, expectations, and requirements that workers must abide by in the course of the job. Employers compel workers to sign these agreements and then they issue 1099s with no taxes withheld even though the facts of the job demonstrate an employer-employee relationship. Employers also at times issue both a W-2 and a 1099 in the same year for the same work, with some of the income on a 1099 even though it was not contractor work. In these cases, workers need not file an SS-8; they only have to account for their employee's share of taxes on an 8919. Sometimes, employers pay workers in cash with no withholding thus putting the taxpayer's Social Security earnings at risk if the worker does not file a return. Many 1099ed workers also often work overtime yet do not get compensated for it because independent contractors are not protected under the Fair Labor Standards Act.

Given the myriad issues these workers face, we have partnered with various stakeholders to address misclassification. When taxpayers are denied overtime or not compensated properly, we refer them to organizations like Community Legal Services or the Sheller Center for the wage aspect of their case. We work with our own unemployment compensation unit when taxpayers' 1099 income does not show up as "wages" on their notices of financial determination. This collaboration has been vital in combating employer misconduct that has grown more rampant in this 21st century economy. In light of those trends, we have conducted outreach and education to raise awareness about misclassification. Employers assert that independent contractor classification can have ostensible benefit like more flexibility, the ability to claim expenses on tax returns, and full gross compensation on paychecks. Through our community engagement with groups like Make the Road PA, Pathways PA, and Beauty Industry Workers' Rights, among other organizations, and in testimony in front of Philadelphia city council, I have sought to instead highlight the onerous tax burdens and the lack of important employee benefits that befall misclassified workers. We are even in the process of a collaboration with the Center for Urban Pedagogy to develop a poster, for distribution to workers' rights organizations and free tax preparation sites, on misclassification. We have also sought to learn from and educate other professionals on best practices regarding misclassification. Pursuant to that goal, I have presented CLEs for the Pennsylvania Legal Aid Network, the Philadelphia Bar Association, and the ABA Tax Section.

In the course of this work, there are many challenges. For one, currently misclassified workers are sometimes hesitant to dispute their 1099 status out of fear of retaliation. There are new protections under the Taxpayer First Act that protect taxpayers from retaliation if they report another individual's failure to pay taxes. There even are potentially anonymous and confidential means of reporting misclassification through the IRS Form 211 whistleblower process and the Form 3949-A. However, even if a taxpayer successfully challenges their misclassification, they still owe their employee's share of taxes. For low-income individuals, these taxes—especially when they are not withheld from paychecks—are burdensome. We have thus researched potential employer accountability in such situations. All told, our efforts have yielded several positive SS-8 Unit employee determinations and taxpayers have saved collectively tens of thousands in IRS debt. As we continue to tackle the problem of misclassification, we seek to have an impactful role in curtailing this practice.

Omeed Firouzi is an American Bar Association section of taxation Christine A. Brunswick Public Service Fellow practicing at Philadelphia Legal Assistance (PLA), Low-Income Taxpayer Clinic. At PLA, he represents low-income Philadelphia taxpayers in disputes with the IRS and assists workers in challenging their misclassification as independent contractors through IRS procedure. Contact him at [email protected].