Financial Stakes for Worker Misclassifcation Getting Steeper

Incorrectly classifying 1099 independent contractors (ICs) as W-2 employees has been a risky proposition for quite some time now. But as government agencies increasingly work together to end the practice, the financial stakes keep getting higher. 

The government is very concerned about worker misclassification due to the loss of tax revenue it causes. When companies classify workers as ICs, they don't pay the employer portion of taxes on those workers. Therefore,the Obama administration has been cracking down on this practice.

For a long time, the IRS was somewhat of a lone ranger in this crackdown. However, that changed when the Department of Labor (DOL) launched its Misclassification Initiative in 2011. The DOL has since collected more than $18.2 million in back wages for more than 19,000 workers. But the real key to the Misclassification Initiative is the "Memorandums of Understanding" the DOL is signing with the IRS and state agencies. By signing these MOU's, the DOL and the other agencies agree to share information about worker misclassification cases. Therefore, employers are likely to face a wider range of costs, including:

  • Back taxes, failure-to-pay penalties, and late filing penalties
  • Back pay, including overtime, and liquidated damages
  • Back unemployment taxes and penalties
  • Penalties for failing to pay Workers’ Compensation premiums
  • Civil penalties (for example, in California, civil penalties can reach $25,000 per violation!)
  • Penalties for missing I-9 forms (required for employees)
  • Interest on back taxes
  • Attorneys fees

Do your clients utilize ICs? If so, you may want to urge them to to look at their IC workforce to ensure that everyone really qualifies for that classification. Each IC should meet the IRS guidelines, which can be found at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/...

You can provide additional help by converting their ICs to W-2 employees whose employment is outsourced to a contract staffing back-office. This allows them to avoid the employment costs and hassles without risking the financial implications that come with misclassification.

Debbie Fledderjohann is the President of Top Echelon Contracting, Inc.

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