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‘Employee’ misclassified? Refer to IRS to recover SS taxes

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in Compensation and Benefits,Human Resources

Employees have to pay 7.65% of their wages to the federal government in Social Security taxes, while employers pay a matching 7.65%. Independent contractors, on the other hand, have to pay the entire 15.3% themselves.

But what happens if an independent contractor is misclassified and should really be an employee? Can the individual sue her putative “employer” for the 7.65% the company or organization should have paid?

Fortunately for employers—according to a recent 3rd Circuit Court of Appeals decision—the answer is “no.” Instead, independent contractors can ask the IRS to decide whether they were properly classified and ask for a refund if it turns out they should have been classified as employees. That’s far better than the prospect of direct lawsuits by any disgruntled independent contractor.

Recent case: Carrie Umland worked for PLANCO selling annuities, mutual funds and other wholesale financial products. She signed an independent contractor agreement and had the entire 15.3% Social Security tax withheld from her earnings.

Later, the company reclassified her as an employee. She sued, alleging that the company owed her a refund of the extra 7.65% she had paid as an independent contractor.

But the 3rd Circuit Court of Appeals said she had the process wrong. She could have asked the IRS to decide how she should be classified rather than sue her company for the tax she overpaid. Then, if the IRS agreed she was an employee, she could file a refund request with the agency. (Umland v. PLANCO, No. 06-4688, 3rd Cir., 2008)

Final note: Umland initially tried to make this a class action. Had the court gone her way, the litigation floodgates might have opened, much the way they have with overtime claims.

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