Will the New Tax Legislation Affect My Employment Status?
There is a lot of confusion surrounding the tax reform package recently passed by Congress and signed into law by President Donald J. Trump. Among the provisions that has prompted questions is a 20% deduction for so-called pass-through entities. This particular deduction could impact far more than your tax bill: It could end up altering your rights under federal and state employment laws.
The Risks and Benefits of Being an Independent Contractor
If you are an employee, you receive a W-2 from your employer each year that reports your wages and taxes withheld to the Internal Revenue Service (IRS). If you are classified as an independent contractor, then you may receive a 1099 and are ultimately liable for reporting your own income on Schedule C of your Form 1040. Most independent contractors are considered “sole proprietors,” but you may also be organized as a general partnership or limited liability company, depending on the nature of your business.
All of these business structures–basically, anything that is not a corporation–are considered pass-through entities, since income “passes through” them and directly to the individual. And under the recently adopted tax law, these pass-through entities will be allowed to deduct 20% of “qualified business income” starting with the 2018 tax year. For example, if you earn $50,000 in business income this year, you can deduct $10,000 of that amount when calculating your taxable income.
While this is good news for self-employed individuals, the New York Times recently noted this could lead to more employers to convert their employees into independent contractors. In other words, an employer could pressure an existing employee into working as an “independent contractor,” thereby allowing him or her to benefit from the 20% deduction.
In exchange, the newly minted contractor would lose many of the legal rights associated with employee status. This includes the right to earn the minimum wage and overtime, as well as the protection of employment discrimination, unemployment insurance, and workers' compensation laws. In the long run, many workers will earn less since they do not necessarily benefit from the same internal pay raises they earned as employees.
Are You a Misclassified Employee?
If your current employer is pushing you to become an independent contractor, you need to carefully consider the implications. Just calling someone an “independent contractor” or issuing them a 1099 instead of a W-2 does not mean a worker is not legally an employee. A true independent contractor exercises control over their own schedule and working conditions. So even if you sign an independent contractor agreement or even setup a separate pass-through entity to receive income from your employer, you may still be properly classified as an employee.
Misclassification of employees as independent contractors is illegal. If you are a misclassified worker, you may be entitled to back wages and unpaid benefits. If you are really are an employee, you retain your rights to sue for illegal employment discrimination or wage and overtime violations. If you are uncertain as to your classification and need advice from a qualified New York employment law attorney, call the Law Offices of Mahir S. Nisar at 646.760.6493 today.