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Misclassifying Workers and 6 Ways to Avoid It

Over the past several years, the government (specifically the IRS) has been cracking down on not just workers who misclassify themselves, but also their employers who allow the process to perpetuate. The Independent Contractor (IC) is becoming more and more prevalent over recent years—and not necessarily for the correct or legal reasons (this of course does not mean that there are not legal and law abiding ICs out there that follow the guidelines set forth by the government) .

 

Let’s determine what an IC is exactly and who qualifies according to federal guidelines.

In simpler terms, you are not an IC if you do not employ others and you are directed by an employer. Typically, an IC works for many different firms simultaneously and has a legal enterprise that meets IRS standards.

 

An IC is subject to self-employment tax. However, he is typically paid by the hour, and taxes are not withheld from his paycheck. This means that the government is not collecting their fair share of payroll taxes, even though you may be sitting next to a W-2 worker who is performing the same duties as you are and does not have the luxury of “writing off” their expenses. We challenge as to why that person should be subject to withholding taxes and the “IC” is not.

 

In 2010, the IRS launched its Employment Tax National Research Project to begin an even more regimented crackdown of companies that are misclassifying their workers. The government considered these companies as firms that were underpaying their fair share of employment taxes. In partnering with the Department of Labor, they set a goal to reduce the tax gap, improve compliance and eventually collect the 1.3 billion dollars that this has cost taxpayers each year. In fact, the IRS has hired over 6000 new employees of their own to audit and monitor this practice.

 

If you or your employer are caught, both you and the employer may be liable for back taxes, IRS fines, interest, retroactive overtime claims and litigation. An IC filing a claim for unemployment may also trigger a tax audit as well.

 

To avoid misclassifying workers, request the following information prior to entering into an IC relationship:

1. Have the IC submit to you their articles of incorporation or organization.

2. Have the IC prove to you that they have filed their taxes as the name of their organization by providing you a copy of their last return. Of course, they can white out the figures if they wish.

3. Provide you with a document indicating their federal ID number.

4. Provide you with any form of marketing such as letterhead, business cards, website or company profile they use for social media.

5. Proof of business insurance to include general liability and workmans’ compensation.

6. An IC is not an employee of yours and therefore should not be treated as one. He should be paid like you pay all of your other suppliers. He is not an employee, so he should not be on your payroll.

 

Lastly, just be informed. Know that there are many third party resources out there that you can contact to help you mitigate the risk. The IRS website is a valuable resource that will provide you with everything you need to know to be safe.