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George Saenz, the Bankrate.com Tax Talk columnistWhen an employer doesn't withhold payroll taxes

Dear Tax Talk,
I am a new graduate of family practice medicine and recently started work at an urgent-care facility. They refuse to take out federal taxes and pay employment taxes. I have read the Internal Revenue Service material about independent contractor vs. employee. I am not an independent contractor because I don't have any say in my hours, staff, billing or anything. I am an hourly employee. Are they in violation or am I missing something here?
-- Karen

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Dear Karen,
They didn't teach you this in medical school. To save money or maintain a competitive advantage, some businesses treat their employees as independent contractors rather than employees.

The business not only saves employment taxes that are around 8 percent or 9 percent of salaries, they also save on benefits such as paid holidays, vacation, workers compensation and health insurance to mention only a few. If it's an industry practice, your employer could be forced into the situation to maintain competitive pricing.

Just because your employer wants to save money or maintain a competitive advantage doesn't mean it's right. The IRS almost clearly defines who should be considered an employee vs. who you can consider to be independent. Since the definition is not absolute, employers attempt to circumvent the rules for their advantage. When this happens there are significant tax ramifications.

As an independent contractor, you may end up paying more in taxes because you have to pay self-employment tax, which is 15.3 percent vs. 7.65 percent if you're an employee. If you don't have any significant expenses to offset against your income, your tax bill will definitely be higher.

If you don't like the situation, your choices are to quit or rock the boat and risk getting fired. If you want to rock the boat, you can turn in your employer by completing Form SS-8. Since the IRS must tell your employer who reported them, this will probably be a career-limiting move.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: March 5, 2003
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