The Hazards Of Independent Contractor

Benefits are offered as a result of classification as an employee. However, that isn’t a reliable indicator of whether worker classification is accurate.

In the example presented earlier where the employer could be exposed to as much as $900,000 in back taxes, their new liability could be less than $10,000. When in doubt, engage an employment attorney specializing in wage and hour issues to help your company.

Interest is also accrued on these penalties daily from the date they should have been deposited . Are the independent contractors reporting to company supervisors? This is another potential trouble spot, as reporting to supervisors would undermine contractors’ control over their own work. The more control a company exercises over individuals’ work, the less likely they are independent contractors. The law demands companies to conduct an audit to all of their independent contractors every 6 months as working terms and conditions are flexible by definition and federal and state law may change. Their main focus of the state and the federal government legislation is surrounding worker misclassification, both regarding how to classify workers and what the legal repercussions are for misclassification.

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Commonwealth clients get the simple and sophisticated payroll, HR, time & attendance, and benefits administration services they need with the support of a team that knows and cares about them. To avoid confusion, it’s crucial to clarify when the “statutory employee” designation becomes relevant. The designation is relevantonlyif a worker is not a common-law employee.

Gray, Gray & Gray enjoys offering valuable advice and guidance through our series of webinars that focus on important issues that affect you and your business. The degree of independent business organization and operation. A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability . Behavioral control—the type of instructions, degree of said instructions, worker training, and evaluation system. News, trends and analysis, as well as breaking news alerts, to help HR professionals do their jobs better each business day. The questionnaire results will then be analyzed as well as cross referenced with federal and state records to establish risk. However, the legal counsel that can define how to properly classify the worker is not familiar with the details of the engagement.

From the IRS’s perspective, independent contractor misclassification results in lost tax revenue and can lead to increased Medicare and Social Security costs if independent contractors become sick, because many of them don’t have health insurance, Sheffield remarked. Governments also seek to increase the reputational costs for companies that misclassify workers. The recent New Jersey misclassification laws allow its department of labor to publish the names of companies that have violated any state wage, benefit, or tax laws. The proposed federal Worker Flexibility and Small Business Protection Act would require companies to post publicly their level of compliance with labor laws. The bottom line is the IRS prefers workers to be classified as employees.

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Because independent contractor misclassification is fraud, its magnitude is not easily documented. Therefore, estimates of misclassification that are currently available rely on administrative data sources, either audit data from enforcement agencies or IRS one-time studies of tax records. A common source of information is the audit data from state unemployment insurance agencies; failure to pay unemployment insurance tax is usually the result of a worker being misclassified. Misclassified workers lack access to workers’ compensation insurance at group rates. Ostensibly, individual coverage is possible and often mandated for the self-employed, but the quality of individual plans varies, and state mandates as to what exclusions and disqualifying clauses are allowed also vary. As noted, misclassified individuals pay the self-employment tax , which amounts to 15.3 percent of earnings below $118,500.

• Employee misclassification happens when workers are mislabeled as independent contractors rather than employees.
• New “sharing economy” businesses create cause for concern about possible misclassification because it is unclear how “autonomous” these workers really are.
• Department of Labor awarded $10.2 million in grants to 19 states to assist in their efforts to combat employee misclassification.
• You don’t usually have to withhold or pay taxes on payments to an independent contractor.
• At least 19 states, including New York, Massachusetts, Michigan, New Jersey, and Iowa have created inter-agency task forces to study the magnitude of the problem and coordinate and strengthen enforcement mechanisms.
• If it is determined that an employment misclassification exists, employers may face significant employment, tax and penalty exposure.

For employers who are caught misclassifying workers, consequences can include hefty fines, not to mention being forced to pay back taxes to make up for years of misclassification. For example, a Connecticut news account noted that “the bigger issue has been employers leaving workers completely off the books, so they can avoid payroll taxes” . Additional research on the worker experience with misclassification—about the experiences and constraints that lead workers to accept misclassification —would be useful. In policy discussions, some have argued that workers usually collude in order to have higher earnings. Identifying under what conditions workers engage in collusion—what rationing of total work hours takes place, what substandard wage is offered, what pressures are exerted—would provide useful information for considerations of means of enforcement.

Are You Unknowingly Treating Independent Contractors Like Employees?

The degree of permanence of the working relationship between the worker and the potential employer. The worker’s opportunity for profit or loss based on initiative and/or investment. B. The worker performs work that is outside the usual course of the hiring entity’s business. A. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact. Allow for easier termination of a contract for services rather than having to fire an employee. The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice.

With TalentWave you can outsource non-essential administrative functions and improve overall reporting. Plus, you’ll be amazed at how much time you gain to focus on strategic projects by outsourcing IC management.

Misclassification Of Employees As Independent Contractors

Unfortunately, the result of this increased government involvement has created a complex patchwork of evolving laws on how to classify a worker – and an increasingly aggressive framework of penalties for employee misclassification. The salespersons perform their services pursuant to written contracts specifying that they will not be treated as employees for payroll tax purposes. Right to quit.Workers who can quit at any time without incurring any liability to you are more likely Worker Misclassification: Why the IRS Cares & You Should Too employees. In contrast, independent contractors generally can’t walk away in the middle of a project without running the risk of being held financially accountable for their failure to complete the project. Expenses.Workers whose business and travel expenses you pay are more likely employees. In contrast, independent contractors are usually expected to cover their own overhead expenses. Workers whom you require to work or be available full time are likely to be employees.

The IRS criteria for independent contractor status are publicized; other areas of regulation such as health and safety or workers’ compensation may use a slightly different definition. This occurs because the criteria for “employee” are established to suit the implementation of particular regulations. Court decisions significantly drive the updating and implementation of these criteria. Underreporting can be higher if the self-employed report cash income. Thus, when misclassified ICs are paid in cash, the odds are quite high that little of their income is reported for income tax purposes. A 1974 IRS report found that independent contractors did not report 26 percent of their income. State worker compensation and disability insurance systems are adversely affected in similar ways.

In 2010, the IRS began a national research project that involved the examination of 6,000 taxpayers, with a focus on whether they were complying with the employment tax reporting and withholding rules. One of the examination areas was worker classification issues. The taxpayers were randomly selected and included large, mid-sized, and small business employers and nonprofit organizations. Not surprisingly, a majority of the audits were of small businesses . An IRS representative recently confirmed that the IRS is finishing up the last of the national research project audits now and that they should have information soon about areas of noncompliance.

The Risks Of Worker Misclassification

Investigations to ensure that the employees are properly classified. Relationship, they do not specifically mention misclassification. Are not eligible for many benefits to which employees are entitled. In addition to these general trends, specific industries, and some companies within those, have surfaced as using IC misclassification systematically. Sen. Sherrod Brown (D-Ohio) and Rep. Jim McDermott (D-Wash.) have both introduced bills to close the Safe Harbor loophole , and President Obama has proposed closing the loophole in his 2012, 2013, 2014, and 2015 budget proposals. The U.S. Treasury estimates that eliminating Safe Harbor would generate $9 billion in tax revenue over 10 years. While these three criteria appear straightforward, in practice they can be quite complex, especially having a reasonable basis for treatment of the worker.

A primary limitation of regulatory mechanisms is that they rely heavily on individual worker complaints; vulnerable workers may not know their rights or may be afraid of retaliation. Research in the field of workplace injuries has found that a notable share of workers do not report their injury to the employer for fear of disciplinary discharge or other form of retaliation (Lipscomb et al. 2013, on carpenters).

What Are The Tests For Independent Contractors?

Alternative to financial advice and services from Wall Street firms. Contractors with whom it does business are properly classified. Rampant discrimination and mistreatment of workers in these jobs. Sectors, especially like construction and building services. Return on investment related to bringing businesses into compliance.

The theory is that employee have taxes withheld directly from their paychecks, while self-employed independent contractors do not have anything withheld and are responsible for paying their taxes themselves. The governments argue that they are only attempting to collect the taxes that are owed and have gone unpaid – or what is often referred to as the “tax gap” – due to independent contractors’ failure to report. The industry itself has a long-standing practice of classifying its workers as independent contractors, such as taxi drivers.

• Employer misclassification of their employees as independent contractors is a widespread phenomenon in the United States.
• Each group of workers that holds similar positions must be treated consistently (e.g., the employer cannot treat any worker holding a substantially similar position as a W-2 employee).
• On the policy front, recent increases in federal and state enforcement and information activities have begun to publicize the problem and to affect practices.
• A 2012 Treasury Inspector General for Tax Administration (“TIGTA”) report found that misclassifying a worker with yearly earnings of $43,007 could save the employer $3,710 per year.
• In September of 2014, Labor Secretary Thomas Perez announced that the U.S.
• So it wouldn’t be at all unusual for a tax auditor to look at the same facts that you did and to reach an entirely different conclusion.

Form 8952 requires the employer to attach a list of the names and Social Security numbers of the target group members. The latter requirement could be problematic if two or more workers are sharing the same SSN (e.g., potential undocumented immigrants). The level of skill, judgment, and initiative required for the functions performed by the worker. Review workers who received Form W-2 in the past but are now treated as contractors.

Employees may receive benefits like health insurance and pension plans. An employer is responsible for withholding income, Social Security, and Medicare taxes from an employee’s wages, and must pay unemployment taxes and cover employees on workers’ compensation insurance. Employees are protected by labor laws like the Fair Labor Standards Act and may be able to access paid medical or family leave benefits. Misclassification is also likely to result in lawsuits instituted https://accountingcoaching.online/ by misclassified employees themselves. For example, misclassified employees will claim such things as an entitlement to an hourly minimum wage, overtime compensation, family and medical leave, unemployment insurance and workers’ compensation insurance. Misclassification of these individuals as independent contractors therefore places an employer at risk of being sued for enforcement of any employment rights that allegedly were denied to these workers.

Company or courier company’s customer’s signage on the vehicle. Guidance with the support of organized labor and the trucking industry. Safe to say that this is the norm for other companies in this industry. Company that repeatedly or willfully commits such violations. And nonunion in the good times is 2 to 5 percent, very close. Independent-contractor specialists to achieve high efficiency. Prohibited from severing its relationship with that caregiver.

Some manufacturers, for example, hire contractors for seasonal peaks or custom projects. In the past, workers were generally hesitant to be classified as independent contractors, because they didn’t want to forgo health and retirement benefits — or job security — that come with being an employee. However, thanks to the new QBI deduction under the Tax Cuts and Jobs Act , more workers are expected to jump on the 1099 bandwagon. Employers looking to save money sometimes decide to treat employees like independent contractors to save money on all those “extras.” Cutting benefits would save the average employer about 30% of its compensation costs. Employers that misunderstand how classification works see this strategy as a savvy way to save money without cutting staff. In other cases, employers misclassify employees simply because they don’t understand the difference between the groups. Correctly classifying a worker as an employee or an independent contractor is critical.

The IRS, DOL, and Florida Department of Revenue, as well as the plaintiff’s bar, are all paying attention even if you are not. Having a full-time employee or a contracted employee could result in different tax obligations for business owners. Business owners with W-2 employees must withhold part of Social Security and Medicare taxes from employees’ wages. Typically employer payroll taxes are made up of federal unemployment taxes, state unemployment taxes, Social Security taxes, and Medicare taxes.

The factors include the existence of written contracts, offering of employee benefits, permanency of the relationship, and services provided as a key activity of the business. If you are in control, based on an objective analysis of the 20 common law factors, then you should be treating the worker as an employee. Use Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to guide your fact gathering of any workers in question.

According to the IRS, the facts of the relationship between a company and a worker determine how the worker should be classified – not what is stated within a written contract. It doesn’t matter if the contract is drafted by an attorney, signed and notarized. Waffle World decides to hire Bill to return once per month to flush the company’s drain, and pays him $600 per month for this service. In determining whether a worker is an employee or contractor, evaluate the amount of control over the details of the work performed. Supreme Court has, on a number of occasions, indicated that there is no single rule or test for determining whether a worker is an employee or contractor. The court has stated that it’s the total activity or situation that controls the classification. To properly classify your workers, you must consider all aspects of the worker-company relationship.