IRS says I should have been W2 not 1099 - now I owe $18K in back taxes??

I'm freaking out. Just got a letter from the IRS saying I was misclassified as a 1099 contractor when I should have been a W2 employee for the past 3 years. They're saying I owe $18,000 in back taxes, penalties, and interest.

Background: I worked for a marketing agency from 2022-2024 as a "contractor." I got 1099s every year and paid my self-employment taxes. But I worked 40 hours/week, only for them, used their equipment, worked their required hours, had to get approval for time off, etc. Basically I was an employee in everything but name.

I left the job in May 2025 and I guess someone (maybe another contractor?) filed a complaint with the IRS about the company misclassifying workers.

The IRS letter says I need to pay the back taxes by November 15 or they'll start collection proceedings. But I already PAID self-employment tax on all that income! How can they make me pay again? Is this even legal?

CPA here. First - don't panic. Second - there's likely a misunderstanding in that IRS letter about who owes what.

Here's how 1099 vs W2 taxes work:

As 1099 contractor, you paid ~15.3% self-employment tax (both employee AND employer portion of FICA).

As W2 employee, you would have paid ~7.65% (employee portion) and employer would have paid 7.65% (employer portion).

When IRS reclassifies you:

• The EMPLOYER typically owes the back employment taxes, not you
• You should actually get a REFUND because you overpaid self-employment tax
• The IRS may be asking you to file amended returns to claim that refund

Read that letter very carefully. Is it actually demanding YOU pay $18K, or is it notifying you of the reclassification and asking you to amend your returns?

What IRS form number is on the letter? (CP2000, SS-8, etc.?)

@TaxCPA_Robert Let me check... it's form CP2000. The letter says "we believe you underreported your income" and lists a bunch of corrections. The $18K number is in a section called "amount you owe" but I'm honestly having trouble understanding all the tax jargon.

There's a worksheet showing:

• Income I reported: $165,000 (over 3 years)
• Self-employment tax I paid: ~$23,000
• What they say I should have paid: ???
• Additional tax owed: $18,642

But if I OVERPAID by paying self-employment tax instead of just employee portion, why would I owe MORE?? This doesn't make sense.

Tax attorney here. CP2000 notices are "proposed" changes, not final bills. You have 30 days to respond and dispute.

The $18K they're claiming sounds WRONG based on what you've described. Possible explanations:

• IRS error: They may not be crediting you for the self-employment tax you already paid
• Missing deductions: They may have recalculated your return without the business expenses you deducted as a 1099 contractor
• Withholding issue: They may be assuming you should have had W2 withholding and are penalizing you for underwithholding

What to do RIGHT NOW:

1. Do NOT pay the $18K

2. Hire a CPA or tax attorney to review the CP2000 notice

3. File a response disputing the assessment with supporting documentation

4. If you were truly misclassified, you should owe $0 or get a refund, not owe more

The IRS makes mistakes on CP2000 notices ALL THE TIME. Don't assume it's correct.

I went through this exact situation last year with the California EDD (state version of IRS misclassification audit). Here's what happened:

1. Got scary letter saying I owed $22K in back taxes

2. Hired a CPA who specialized in employment tax issues

3. CPA filed a protest with full documentation showing I already paid self-employment tax

4. After review, the agency admitted their calculation was wrong

5. Ended up getting a $3,200 REFUND instead of owing anything

The whole process took 4 months but the CPA cost me $2,500 vs potentially paying $22K I didn't owe. Best money I ever spent.

Don't try to handle this yourself. The IRS won't help you figure out their own mistake - you need professional representation.

@ContractorCarla - Yeah, that CP2000 is almost certainly wrong. Here's likely what happened:

The IRS got notice that you were reclassified to W2. Their system automatically recalculated your taxes as if you were W2 employee. BUT their system doesn't automatically credit you for the self-employment tax you already paid as 1099.

So the computer sees: "She should have paid W2 employee tax, she didn't have any withholding, therefore she owes money."

But the computer is WRONG because you actually paid MORE than W2 employee tax when you paid self-employment tax.

What your CPA will do:

File amended returns (1040-X) for each year showing:

• Remove self-employment tax you paid
• Add W2 employee FICA (half of what you paid)
• Remove business expense deductions (can't deduct as W2)
• Claim refund for the difference

You should end up NEUTRAL or slightly ahead, not owing $18K.

This is such a relief to hear. I was literally losing sleep thinking I'd have to pay $18K I don't have.

Follow-up question: What about the company that misclassified me? Are they in trouble? Part of me wants them to face consequences because they knowingly treated us like employees while calling us contractors to avoid paying employment taxes and benefits.

There were like 6 of us in the same situation at that company.

Oh yes, your former employer is likely getting absolutely hammered by the IRS right now.

What the company faces:

• Back employment taxes (employer's portion of FICA) for all misclassified workers
• Federal unemployment taxes (FUTA) they didn't pay
• Penalties for failure to withhold and remit taxes
• Interest on all unpaid taxes going back 3+ years
• Potential state employment tax assessments too (unemployment insurance, disability, etc.)
• Possible Department of Labor violations if they denied you benefits/overtime

For 6 workers over 3 years at your income level, they're probably looking at $75K-$150K in back taxes and penalties. Possibly more.

The IRS tends to be much harsher on employers for misclassification than on workers, because employers are the ones who benefit financially from avoiding employment taxes.

You might also have grounds for a private lawsuit to recover benefits you were denied (health insurance, 401k match, etc.) but that's a separate issue from the tax question.

Update: Hired a CPA who specializes in employment tax issues. Cost $1,800 for representation on all 3 years.

She reviewed everything and confirmed the IRS notice is wrong. She's filing a protest response with amended calculations showing I actually overpaid by about $4,200 over the 3 years.

She said it'll take 3-4 months for IRS to process the response but she's confident they'll withdraw the $18K assessment and issue me a refund instead.

Also found out from a former coworker that the company is indeed being audited by the IRS and they had to hire a law firm. Karma I guess.

Thanks everyone for the advice, especially @TaxCPA_Robert and @TaxLawyer_Michelle. Without this thread I probably would have panicked and tried to set up a payment plan for money I don't actually owe.