I was hired as an employee three years ago. The business has been unstable, meaning work has been getting more and more irregular, and my boss (the owner) has talked about it too.
January 2008 he canceled his payroll service and started handwriting the paychecks. He said he was taking taxes out, but today (Aug 08) he told us that he has not been taking out taxes. He plans on sending us a 1099 Employee Form- his words- at the end of the year. He said he would not be able to afford to pay us if he didn't do this.
I have been researching 1099 forms today, and what he is doing sounds shady and serious. I'm getting confused and a little freaked.
What should I be asking him? How do I prepare for next April's taxes? What forms will I have to file? Where do I go for help?

How you will treat the 1099-Misc income, read: Your U.S. Tax Return: W2 vs 1099-Misc: Employee vs Independent Contractor.

Many people are 1099, the issue here is that you have to pay all of your own taxes from the money, including the extra social security taxes.
So most 1099 employees are normally paid a higher wage since they are paying their own taxes.

Now you have to be independent, and fit the rules for a 1099 employee

Your employer technically cannot just declare that you are now independent contractors where before you were employees without significant changes in how he treats you in the work place.

For example, if he pays you by the hour and requires that you work a set number of hours, say 8:30 to 5:00 with 30 minutes for lunch, you are being treated as an employee, NOT as an independent contractor.

If he performs annual evaluations that he uses as the basis for the payment of bonuses and pay increases, you are being treated as an employee, NOT as an independent contractor.

There is a comprehensive checklist that the IRS uses when employees challenge their "independent contractor" status. You can download the checklist from the IRS website (Internal Revenue Service) if you wish.

Tax-wise, as an independent contractor, YOU become liable for BOTH sides of the FICA (Social Security and Medicare) taxes. On the surface, that increases your tax liability by 7.65 percent.

However, you can and should claim certain employee expenses on Schedule C that you could not realistically claim as an itemized employee business expenses. Some of these expenses can include the business use of your cell phone, the business use of your home computer, the cost of business supplies that you paid out of pocket, and the business use of your car (though you CANNOT claim your commuting costs).

These expenses CAN reduce your income enough to offset the added FICA taxes.

There are also added writeoffs for medical insurance and the possibility of setting up a pension plan in your name.