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Six Common Triggers for an IRS Misclassification Audit

We've talked a lot on this blog about the government's crackdown on the misclassification of W-2 Employees as 1099 Independent Contractors and have provided resources that recruiters can use to educate their clients on this issue. But if your clients are like a lot of employers out there, they may be thinking it is unlikely that they will be audited, especially if they are a particularly small company.  However, even if a company is very small, there are a number of triggers that could cause that company to show up on the IRS' radar and spur a worker misclassification audit:

  • The 1099 Independent Contractor (IC) files an unemployment claim.  This creates suspicion because a they are not eligible for unemployment.
  • The 1099 IC files a workers’ compensation or disability claim against the company.  If someone is truly an IC, they should carry workers’ comp and disability insurance on themselves because they are not eligible through an employer.
  • A worker receives a W-2 and a 1099 Form from the same employer in one year. This happens when they are converted from a 1099 IC to a direct-hire of the company.  But if they performed the same work as a 1099 IC and a W-2 employee, the IRS may wonder why they were not classified as an employee all along.
  • The worker files a complaint with the Department of Labor’s Wage and Hour Division. With all the information out there about misclassification, workers are more savvy than your clients may think and can blow the whistle if they think they have been misclassified.
  • The worker feels they are being improperly treated as a 1099 IC and files a Form SS-8 with the IRS for their own classification determination or files a Form 8919, Uncollected Social Security Tax and Medicare Tax on Wages, with their personal income tax return.
  • The IRS is anonymously alerted about the worker or the employer not paying taxes.

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

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Tags: 1099, Audit, Audits, Comp, Contractors, Employees, IRS, Independent, Misclassification, Unemployment, More…W-2, Worker, Workers

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