An official answer depends on more details. See IRS Tax Topic 752 on employee vs.
self-employed at http://www.irs.gov/taxtopics/tc762.html
From a tax standpoint, it's mostly a matter of FICA (social security and medicare) tax. As an employee, you pay 7.65% of your salary as FICA and your employer pays the other half (7.65%). As a self employed person, you pay the whole 15.3%.
There is nothing illegal about your arrangement. It's done frequently. If you knowingly went into the agreement, you should just file as self employed person (schedule C) and pay the self employment tax (SET). The self employed pay their FICA as SET.
There is a way to contest the
“employer’s” classification of you as a contract employee. That is to pay your
share of the Social security tax on form 8919 .In TurboTax, type> form
8919 with 1099-misc income <in the search box. After you enter your 1099-Misc, select that
you got the 1099-Misc for another reason. Then select "My employer reported
this extra money on a 1099-MISC but it should have been reported on a W-2"
from the drop down list.
You also have to submit form SS-8 and the IRS will determine whether you or
the employer pays the employer portion of the SS tax. You will probably also
upset your employer, because the IRS may contact him about whether or not he
properly paid wages.
Form SS-8 is not in TT but is here ===>>> http://www.irs.gov/pub/irs-pdf/fss8.pdf
