Employee Misclassification Could Cost Your Company Tens of Thousands of Dollars
It’s estimated that millions of American workers who should be classified as W-2 employees are misclassified as independent (1099) contractors. This generates less income tax, less revenue for state unemployment and less funding for workers’ compensation.
Federal and state agencies are losing millions of dollars in tax revenue each year due to worker misclassification. To make up this loss, the IRS received funds for 100 additional “enforcement personnel” this year. Enforcement sweeps and fines are expected to increase Treasury receipts by more than $7 billion over a ten year span.
What is Employee Misclassification?
According to the US Department of Labor, “Employee misclassification occurs when a worker is improperly denied the benefits and protections provided to an ‘employee’ as that term is defined by State and Federal law. Misclassification hurts workers, deprives the government of tax revenue, and undercuts legitimate employers who classify their workers correctly.”
Many employers prefer using independent contractors for a variety of reasons: the employer benefits from lowered taxes, avoids the costs of workers’ compensation insurance and reduce exposure for employment claims. The independent contractors also benefit with additional tax write-offs and they enjoy greater flexibility in their work arrangements and hours.
The distinction between employee and independent contractor are of vital importance.
Employee or Independent Contractor?
The IRS considers three aspects of control when determining whether a business employs a worker: behavioral control, financial control, and the relationship of the parties.
- Behavioral control – the right to direct or control how the worker performs the specific tasks for which he or she is hired.
- Financial control – theright to direct or control the financial aspects of the worker’s activities.
- The relationship of the parties is generally shown bythe parties’ agreements and actions
with respect to each other, paying close attention to those facts which show not only how they perceive their own relationship but also how they represent their relationship to others.
Enforcement Sweeps May Be Coming Your Way
“You are cheating your workers and the taxpayers, and undercutting honest businesses. We are looking for you – and the chances that you will get caught have never been better.”
— Commissioner Colleen Gardner of the New York State Department of Labor
The Cost of Worker Misclassification
If the IRS decides independent contractors should have been classified as employees, the company must be prepared to pay a price. As a general rule, this “price” includes both the employer’s share of FICA taxes and the income and FICA taxes that were not withheld from the employee’s earnings. Additionally, the company should expect fines to be assessed for the violation.
Consider this example:
TMC Management Group, Inc. of Waterford, MI
Dates: 10/24/09 through 1/23/10
3 to 5 core employees were paid $15 to $20 per hour, plus proper overtime. Other employees were either off the books or classified as independent contractors.
54 employees were owed wages of $19,285.75, plus liquidated damages of $4,891.43. A civil penalty of $7,500.00 was assessed.
Total: $31,607.19.
Protect Yourself – Be Proactive
Hiring a reliable third party to act as the legal W-2 employer of contract workers will prevent the misclassification of workers.
The payroll company assumes unemployment, workers compensation, and benefits expenses.
A payroll program allows businesses to select and screen their employees while
still receiving the benefits of a staffing program. You select the employees and the payroll company becomes the employer of record. This solution allows you to add employees without adding to your head count.
Moreover, payrolling employees gives you time to evaluate new employees before putting them onto your payroll, downsize full-time headcounts, while still retaining talent, and staff for project/contract-based work, utilizing experts such as former employees, consultants or specialists.
Your company can still enjoy the benefits independent contractors provide, without the risk they bring along. Contact Doherty Staffing Solutions today to learn more about our payroll program.
About the Author
Samantha Bishop-Strand is the Marketing Manager of Doherty Staffing Solutions in Edina, Minnesota.
A contract and temporary staffing firm, Doherty Staffing is one Minnesota’s largest staffing solutions providers.
We provide customized workforce solutions to fit the specific needs of both job seekers and employers. We partner with our clients to attract and retain a skilled workforce, and work closely with our employees to be sure the correct job placement is made.
Whether we are matching an employee to a position or a staffing representative to a client, Doherty Staffing is committed to being a true partner to our clients by providing long term and solution oriented services.
For more information, visit our website: www.dohertystaffing.com
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