You already know that W2 employees and independent contractors are entitled to different benefits and typically, independent contractors cost companies a lot less than employees. For this reason, some companies have bent the rules and classified workers incorrectly on purpose. Others have taken advantage of gray areas in the law to save money. And believe it or not, we’ve seen some companies who simply don’t know the rules and misclassify workers unknowingly. No matter the motivation, mistakes are costly.
It’s a New World
The gig economy, start-up culture, and the rapid growth of the independent workforce have created a trifecta of pain in the form of increased scrutiny by government agencies seeking to ensure workers are appropriately classified.
In many cases, worker classification laws have resulted in the narrowest definition of an independent contractor to date. It’s now even more crucial for companies to evaluate or reevaluate the way they classify employees and get on the right side of the law before the IRS’s attention reaches their headquarters.
Employee Classification Matters
You can’t ignore worker classification rules. Unless of course, you’re ready to face a potential multimillion-dollar price tag.
You might get away with breaking a traffic law 100 times and lose any fear of the consequences. But that 101st time, you could end up seeing those flashing gum balls in your rear view mirror. Unfortunately, “Oops, I didn’t mean to” holds little weight with police officers. Similarly, the defense doesn’t hold up in court when you’ve misclassified an employee. Whether you knowingly or accidentally misclassify employees as independent contractors, it’s considered wage theft. The government doesn’t take that lightly.
Committing wage theft has some serious consequences. Businesses that misclassify workers as independent contractors deprive federal and state governments of billions of dollars in tax revenue. Big Brother is watching and Big Brother wants its money.
The cascading effects guarantee continued pain. Misclassifying an employee puts your business at risk of an IRS audit. In addition to monetary fines like back pay, back taxes, severance and healthcare coverage for misclassified workers, you could also be looking at legal fees, reputation damage and even criminal and civil penalties. If you’re found guilty of fraud or intentional misclassification, you may be fined for each misclassified employee with fines multiplying with subsequent violations.
Conduct Internal Audits
Conduct an internal audit on your company’s policies and documentation process. Run each worker through the ABC test to determine if they really are an IC or not. Look for areas that need improvement. If you’re missing any documentation (like signed contracts), take any necessary steps to get what you need. If you think you’ve misclassified a worker, make sure you carefully document any changes you make.
If you run your internal audits and still don’t feel confident you have the right status, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. To be safe, you should treat the worker in question as an employee until you’re sure.
Not sure if you’re classifying your employees the right way? Take our five-minute worker classification self-audit to determine just how independent your independent contractors are.
Regularly Review Classifications
Worker roles can evolve over time, as do the rules around worker classifications, so it’s a good idea to review each worker’s classification annually and make adjustments as needed.
That’s a lot of work, which is why many organizations that contract independent contractors partner with an Employer of Record—a firm specializing in independent contractor compliance and engagement. An Employer of Record helps your company meet compliance standards, reduce misclassification risk, and successfully manage independent workers. That’s exactly what we do at PayReel.
Outsource Employee Classification to The Experts
PayReel will help you manage your workers so your business can focus on doing what it does best. As your Employer of Record, PayReel will help ensure that all your independent contractors are properly classified and your business stays ahead of the compliance curve. There’s no need to gamble with something so important. Contact us today!