Is it legal for my employer to send me both a W2, and a 1099-MISC without telling me before? They say its for commissions, but isnt that employment earnings on the clock?

[AAO]

I get paid a percentage commission for every job that we fulfill that was quoted by me. I was always on the clock while going out and doing these estimates, and they were part of my usual work. in pretty much every instance, going out to give these estimates was mandatory.

[Opus 17]

In almost all cases, your employer should pay all your wages on a W-2. They may be trying to avoid their responsibilities for employment taxes, unemployment insurance, workers comp, and other costs.  However, there are a few fields where separate 1099's for commissions are allowed, such as real estate and auto sales ("spiffs").  Can you tell us something about the work you do?  Is the commission paid by your employer, or is it paid by an upstream vendor and passed through your employer?

[AAO]

I am a window cleaner and i bid new clients houses when they send a estimate request. Like i said, im always on the clock when im driving around performing these. Yes, my employer pays these commissions to me once the work is completed for that specific job. The commission is 10% of the total that we get from the job we quote.

[AAO]

I feel like i shouold have been informed beforehand and should have been given the option to have taxes taken out of my commissions

[Opus 17 · Accepted solution]

Well, firstly if you knew you weren't getting taxed on this income, you should have known something was wrong and checked with someone first so you could at least set aside money for the taxes.  15-30% minimum depending on other factors.

As far as I know this income should be reported on your W-2, not on a 1099.  If you report this as "self employment" income you will owe regular income tax plus 15% self employment tax.  If you report it as "I was supposed to get a W-2" you will still owe regular income tax, but you will only owe 7.65% employment tax (social security and medicare tax that should have been taken out of your paycheck).

In Turbotax after entering the 1099, there is page listing special circumstances and one of those circumstances is "this income should have been on my W-2 from the same employer".  Turbotax will prepare a "substitute W-2" form and charge you the 7.65% FICA and medicare tax and regular income tax but won't prepare a schedule C or charge the 15% SE tax.  Your employer may get a letter from the IRS asking why they did not correctly report their commissions but the letter won't identify the person who "outed" them.

You always owe your correct tax, not anyone else.  If you end up owing a penalty for underpayment, because you did not have taxes properly withheld during the year, you might have a case that the penalty should be paid by your employer since they are the ones who paid you incorrectly.  But the IRS won't help you make your case -- you might need to talk to a labor lawyer or file a complaint with your state department of labor.

[AAO]

I understand. Thanks very much for taking the time to answer me, and help me to understand the situation and laws a little more clearly. Unfortunately for me, our company is a pretty small operation and there is only 2 of us who get commissions. So if my boss did get a letter from the IRS, theres no doubt that he would know that its in regards to me. Im pretty confident that im the only one raising concern about the matter; considering the fact that i spoke with my coworker who is the other guy that receives the commission checks, and he said that he didn't even get a 1099 for his. I told my boss that and asked "well why would i get one and he didn't?"

He called my coworker to confirm and said that he should have gotten one. Whatever the reason for his not being received, and considering he has already filed his taxes for the year, he was told something vague and that hell probably just have to file it with next years taxes. I dont know, the whole thing seems kind of shady to me. I dont feel as though i should be considered an "independent contractor" for this type of thing.

Does the info below aid in my argument?

26 CFR § 31.3401(c) (employee defined)
If an employee is mistakenly classified as an independent contractor and the employer has no reasonable basis for doing so, the employer may be held liable for employment taxes for that worker.
26 CFR § 31.3401 (c) -1(b).


(b) Generally the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee.

[Opus 17]

So that's generally what I am talking about when you check the box for "this 1099 should have been included in my W-2."  there's no doubt you should be classified as an employee and not a contractor, and as an employee, your employer is supposed to withhold 7.65% medicare and social security tax and pay a matching amount.  (15.6% total)

("Employment taxes" refers to social security and medicare tax, or FICA and OASDI, it might be abbreviated as.  Normally, the employee pays half and the employer pays half.  Under very rare circumstances, you can make the employer pay the full 15% but I'm not sure you are in that kind of situation.  "Employment taxes" does not refer to income tax, you always owe your own income tax.  The issue here is whether you want to pay 7.65% employment tax or pay 15% employment tax and not make waves.)

By reporting the commission on a 1099, the employer is trying to make you responsible for the full 15.6% employment taxes, which is called self-employment tax and is calculated using schedule C and schedule SE for self-employed, independent contractors, sole proprietorships, and so on.  (It nets out to slightly less than 15% after a partial deduction).  

Since you have a W-2 for your regular wages, you don't need to file a form SS-8 for an official determination of whether you are an independent contractor or an employee -- that issue is already settled.  What you need to do is to decide as a practical matter whether you want to pay 7.65% (by checking the box for "this money should have been included in my W-2") or 15% (for reporting self-employment income.)  I can't tell you when or if the IRS will get around to making noise for a small timer who makes this kind of mistake.  Certainly an IRS letter is no joke, and the employer needs to get some education so they can handle this correctly for 2018.  But it's a fairly small time error.  The question for you is do you want to make waves and pay the correct tax, or keep quiet for the sake of your job and pay a higher incorrect tax.

(By the way, your co-worker is responsible for paying tax on their full income even if they don't get a 1099.  It's not 2018 wages and the employer should not issue a 1099-MISC next year for money paid this year.  That's only digging a deeper hole and your employer really needs to get some professional tax advice.  Your co-worker can report the income without a 1099 as "other income" and there is also a procedure to get this included on their substitute W-2 form so they also only pay 7.65% social security tax instead of 15% SE tax.)