Today’s businesses rely on temporary staffing, independent contractors, and outside consulting firms opposed to hiring employees to meet their needs. However, employers may be liable when they incorrectly classify these workers as independent contractors. It is important to classify workers appropriately or risk facing stiff penalties from the Internal Revenue Service (IRS) and the Department of Labor.
Businesses may be tempted to classify workers as independent contractors due to cost savings from not having to pay social security and employment taxes. Independent contractors are not covered under unemployment or Workers’ Compensation insurance, and they are not eligible for health care and leave of absence benefits. Their taxes are also not withheld by the company. However, employers are simply not aware of the nuances of employee classification and mistakenly believe that they correctly classified them as an independent contractor.
A misclassification occurs when an employer classifies a worker as an independent contractor when they should be classified as an employee. Both intentional and unintentional misclassifications carry penalties for employers from the IRS and Department of Labor. When the misclassification is intentional, the employer may be liable for 100 percent of the worker’s taxes. Employers may be liable for almost 40 percent of the workers taxes when their misclassification is unintentional.
Governments lose considerable amounts of tax revenue due to employer misclassification of workers prompting a recent crackdown and increased scrutiny of employer classifications of their workers. Employment taxes withheld cause revenue losses for the Social Security Administration, Medicare, state unemployment, and workers compensation funds. Because of the losses incurred, government agencies, such as the IRS and Department of Labor, have an incentive to monitor and audit employers for misclassification. Furthermore, the Department of Labor wants to protect workers so that they receive all that they are entitled to as employees and prevent employer abuse.
Classification of workers as independent contractors may trigger audits by the IRS. When determining whether a worker is an independent contractor, the IRS looks at several factors to determine the degree of independence and control the independent contractor exerts in their work. The following considerations are used to determine the appropriate worker classification:
Behavior Factors: Behavioral factors include the degree of control the company has over the worker. Does the employer provide training, guidelines, equipment, and tools? Are the functions provided executive and managerial in nature?
Financial Factors: Financial factors look at how the worker is compensated. A true independent contractor would provide invoices that account for profits and losses. An employee is paid a steady amount on a periodic basis.
Our team of attorneys at MacMain, Connell & Leinhauser provide human resource counseling, as well as employment-related services. It is not worth triggering an audit and risking penalties from the IRS or Department of Labor. Call us today at 484-318-7106 or contact us online for an initial consultation. Located in West Chester, Pennsylvania, we serve clients throughout Philadelphia and Chester County.