Overview
Worker classification in Wrapbook determines how a worker is taxed and paid — either as an Employee (W-2) or a Loan-Out (Company). Misclassifying a worker can result in incorrect tax withholding, processing fees, and year-end tax reporting errors.
This article covers what to do if you discover a misclassification after a worker has already been onboarded and paid.
Worker classification has legal and tax implications. If you're unsure whether a worker was correctly classified, consult your payroll accountant or legal counsel before requesting a correction.
Before payroll has been run: change it yourself
If you catch the misclassification before the worker's first payroll, you can correct it yourself. For step-by-step instructions, see Worker classification.
After payroll has been run: contact Wrapbook Support
Worker types cannot be changed directly after a worker has been paid. A correction requires Wrapbook's Operations Team to process a payment reversal and re-run payroll under the correct classification.
To request a post-payment classification correction:
Contact Wrapbook Support with the following information:
Worker name and project
Incorrect classification (what they were set up as)
Correct classification (what they should have been)
Dates and amounts of affected payroll runs
Wrapbook's Operations Team will review and advise on next steps, which typically include:
A reversal of the incorrectly processed payroll
Re-processing under the correct classification
Recalculation of applicable taxes, fees, and withholdings
Important: Do not run additional payroll under the incorrect classification while waiting for a correction. Contact Support before running your next payroll cycle if a misclassification is discovered.
What happens to existing tax withholdings?
The impact on tax withholdings depends on the direction of the misclassification:
W-2 (Employee) processed incorrectly as Loan-Out
W-2 employees have federal and state income taxes, Social Security, and Medicare withheld. If the worker was paid as a Loan-Out (no withholding), these amounts were not withheld.
A payroll reversal and re-run will apply the correct W-2 withholdings. The worker may owe taxes on the previously un-withheld amounts.
Loan-Out processed incorrectly as W-2
If a Loan-Out was processed as a W-2 employee, incorrect withholdings (FICA, federal/state income tax) were applied. A reversal will refund these.
The worker will receive a 1099-NEC (not a W-2) for the corrected period
Will corrected tax documents be issued?
If the misclassification occurred in a prior tax year:
A corrected W-2 (Form W-2c) may need to be issued for amounts that were incorrectly reported as W-2 wages
A corrected 1099-NEC may need to be issued if Loan-Out payments were mis-reported
Wrapbook's Operations Team will advise on whether corrected year-end tax forms are needed as part of the correction process.
If the misclassification occurred within the current tax year and is corrected before year-end, amended year-end forms are typically not required — the correction will be reflected in the worker's final annual figures.
How to avoid misclassification at onboarding
Misclassifications most often happen when the wrong classification is selected during the worker invitation step. To prevent them:
Confirm the worker's type before inviting them — ask whether the worker will be paid as an individual (W-2) or through a corporate entity (Loan-Out/Company)
Loan-Outs require specific documentation — a valid EIN, legal business name, and confirmation of S-Corp, C-Corp, or qualifying LLC status. Do not set a worker up as a Loan-Out unless this documentation is confirmed.
When in doubt, default to W-2 — it is easier to convert an incorrectly classified W-2 to a Loan-Out before payroll than to reverse a payment after the fact
For a full explanation of classification types, see Worker classification.