First of all, as a practical matter, he could lose the job by challenging the employer on this. Although it is illegal for an employer to fire an employee for reporting a violation of law to a government agency, in a small business such as this, it would at the least create very bad feelings. So he could accept the classification as independent contractor and pay quarterly estimates of income tax. He would end up paying a little more social security than as an employee, but that would be about the only difference. See IRS Publication 17 for the details of this. You can download IRS Publication 17 at
http://www.irs.ustreas.gov/forms_pubs/index.html.
If you want to go into this, here is the general rule about independent contactors:
People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if the “employer” has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. All evidence of control and independence must be considered. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. For more detailed rules on making the determination, see IRS Publication 15, Circular E, Employer’s Tax Guide. You can download Publication 15 at the above link.
If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. You can download for SS-8 for free at the above link.
