IC

Right now, it seems that you are between a rock and a hard place.  It seems that there is no real solution to how to make them treat you fairly and still keep the job.  You could report them to the IRS for calling you an IC and treating you like an employee.  I'm not sure about all the laws involved with an Independent Contractor/Client relationship, but I'm pretty sure you could file a claim against them in court to collect any money owed to you. 

If you are an IC, then you are the provider, while the customer is the client.  As for being charged a penalty, it seems to me that they cannot just suddenly decide to do this unless it is written into your contract.  If you signed a contract that included this provision, then they can charge the penalty.  However, as an IC, you have the right to form your own contract.  I've noticed many companies who provide the contract TO the IC, which seems pretty backwards to me.

The US Department of Labor doesn't seem to have many rules with regards to IC/client relationships.  They have a lot of rules that apply to employee/employer situations. 

The main objective of the IRS, of course, is the collection of taxes.  There are harsh penalties for any company that hires people, calls them ICs to save themselves the taxes, but treats them like employees. If the company is calling you an IC, but then trying to control your every move, then you are probably misclassified as an IC.  You can file a complaint with the IRS, asking if you are misclassified, but this will not likely solve your current issue with the client/employer.

More information is available here:

http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

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