Misclassification of Workers: What Are Your Options When You Get It Wrong?

Misclassification of Workers: What Are Your Options When You Get It Wrong?

As we embark on a new year we often use the phrase “out with the old and in with the new”. This may be the slogan that businesses perhaps should adapt at it relates to their taxes and the way they operate. What has worked in the past does not mean it will work in the future, particularly when mistakes or poor decisions have been made, and a business owner runs the risk of getting audited.

A very problematic area for the government and businesses alike is the misclassification of workers. It has been a growing trend in the last two decades, especially during the housing boom in 1990’s, where employers in the construction industry would classify workers as independent contractors even though it was clear they didn’t meet the requirements under the common law rules.

The problem has escalated in recent years as the economy suffered the recession and businesses of all sizes look for ways to cut costs and increase their bottom line profits. Because of the billions of dollars lost from employment taxes, the IRS has started to increase enforcement on worker classification.

Some of the most common worker classification issues occur from misclassification of employees as independent contractors, and classifying common law employees as statutory employees.

Employment audits can occur at the federal or state level, and with most states having contracts with the federal government, many labor audits begin by state labor agencies with the audit findings being submitted to the Internal Revenue Service. This should be of particular interest to businesses that get audited by their state labor department because what may seem as a non-significant state audit can turn into a federal case with serious consequences.

A worker classification audit can be triggered due to various reasons. A high number of 1099-MISC being filed can trigger an audit, a random audit can occur, or a current or former disgruntled worker can file Form SS-8 requesting that the IRS make a determination on their worker classification status. Read more on CPA Practice Advisor