Classify Your Independent Contractors as Independent Contractors. Or Else.
Every employer knows there are tax advantages to be gained by engaging independent contractors rather than salaried employees. And there’s nothing improper about using ICs in the right situations. But governments are losing millions of dollars in payroll tax and other revenue and workers are losing benefits, including Social Security, health care and unemployment insurance, because of employers who falsely or mistakenly classify employees as ICs. Lately, with the economy driving tax revenues down, the federal and many state governments are cracking down on employers who treat what should be workers as contractors. Since 2009, the Labor Department has collected more than $9 million in back wages for 15,000 workers in cases primarily involving misclassification of independent contractors. Recently, the Labor Department and the IRS signed a memorandum of understanding to share information and coordinate law enforcement efforts.
If you classify an employee as an independent contractor you can be fined thousands of dollars and be required to pay back wages to the worker. Moreover, it’s simply not fair, not only because it yields a competitive advantage over those who are playing by the rules, but because if employees misclassified as contractors get hurt on the job, they may not be able to get workers compensation. And if they’re laid off, they may not be entitled to unemployment benefits.
There are a number of federal rules defining what makes a worker an independent contractor or an employee, as well as rules specific to your state. It’s best to familiarize yourself with them before taking a chance. Many attorneys recommend hiring contractors through a temporary employment agency, who need to be experts in the ins and outs of the rules, and who take responsibility for the classification of the worker.
Whatever your situation, be careful about how you classify your workers. A mistake could get expensive.