If you’ve come anywhere near a Human Resources newsletter in the last six months, you know the government is serious about targeting misclassification of employees as independent contractors. More attention on worker classification means an already risky business is about to get riskier.
Businesses like to work with contractors because it helps them avoid paying for health insurance, 401Ks, and other benefits. Independent contractors are affordable and available for à la carte services. While some worker advocates make it seem like employees always have the preferential role, many workers prefer the autonomy of contracting. They enjoy the flexibility and the ability to work with a variety of companies and pick their projects. In some cases, it’s truly a win/win.
On the other hand, when it’s done improperly, it can truly be a lose/lose.
Why do the IRS and DOL care so much about worker misclassification?
Employee misclassification is high on the IRS’s list of least favorite things. You can bet if they have their collective knickers in a bunch, there’s one issue at the core: money. Non-compliance with IRS and DOL regulations governing which workers are classified as W-2 employees versus 1099 contractors means lost tax revenue at the state and federal level. That’s because fewer tax dollars are coming from employers without a corresponding increase in tax revenues from independent contractors.
Businesses are equipped to make sure employees stay in line with labor laws, benefits, worker’s comp, unemployment insurance, and of course, tax withholding. Independent contractors, on the other hand, can operate in the wild, wild west of legal lands. They may or may not pay taxes properly, they may overstate their deductions, and they are just harder to keep tabs on. Incidentally, each of these woes also make the list the IRS’s least favorite things.
This, combined with huge federal and state budget deficits, is a recipe for stepped up surveillance and enforcement. The IRS, DOL, and several state agencies share employer information with specific the goal of tracking down practitioners of worker misclassification. Worse, the government doesn’t care if employers misclassify accidentally. It’s up to you to abide by the law.
What Are the Risks of Misclassifying Independent Contractors?
There are legitimate independent contractors and businesses who employ them properly, but misclassifying an employee as an independent contractor can be incredibly damaging, costly, and time consuming.
With the government’s increased attention on the subject, news bringing misclassification to workers’ minds, and companies coming under scrutiny, one thing is sure: If you haven’t paid attention to worker classification yet, it’s time.
Relax. We Got It
If you’re concerned about misclassification, we’re here for you. It’s our job to know the laws and keep clients compliant. At PayReel, we make sure our clients are able to hire who they want, when they want and that everyone is classified correctly and paid properly. Contact us anytime at 303-526-4900 or by emailing us here.