Consequences of Independent Contractor Misclassification

By hrlineup | 09.01.2020

There is always a lot of confusion faced by both employers and employees concerning whether temporary or part-time workers should be classified under employees or independent contractors. What employers need to know is that classifying an employee wrongly under independent contractors is a serious offense that could end up costing the employer and the company a lot of money. There are independent contractor misclassification penalties too, which can be very stiff. To understand this better, take time to understand what an independent employee is.

When classifying employees, the amount of control an employer has over an employee is what determines the type of employee he will be. Companies that work with independent contractors are those that only tell the contractors the type of work there is but does not have control over how the contractor will handle the work to achieve the desired results. In most cases, independent contractors use their personal resources to get the work done and some of their expenses are never reimbursed.

IRS conducts a right-to-control test to determine whether a worker is an actual employee or an independent contractor, in order to nab those employers who misclassify their employees. If found guilty of that, there are consequences of independent contractor misclassification that the employer must face. The facts that IRS uses to establish whether an employee is an independent contractor or an employee are:

The behavioral control an employer has over the employee– do you have control over what your employee does for the period they are working for your organization? If yes then it means that the worker should be classified as an employee, otherwise you will face consequences of misclassifying employees as independent contractors.

The financial control the employer has over the worker– IRS expects an independent worker to have a substantial investment of tools or facilities that they use to get their job done. This means that they can offer similar services to other businesses with the same tools and facilities and do not get reimbursed for such expenses by the business. What they get after service delivery is a flat fee. If your workers do not meet this criterion, employee misclassification penalties will apply.

The kind of relationship the worker has with the employer– independent employees work on contractual basis and do not get to enjoy the benefits that other workers get such health insurance coverage and paid vacation. An employee on contract will not have a strong relationship with the business’ clients too.

Employee misclassification is affecting many businesses today. Independent contractor misclassification damages that a business is made to pay are many, for instance $50 for every W-2 Form that the employer failed to file and 1.5% of the wages as penalties and 40% of the FICA taxes that the employer should have paid. There is also a penalty of 0.5% of the unpaid tax liability for every month that the employer failed to pay taxes, up to 25% of the total tax liability. It is important for employers to understand and classify their employees correctly to avoid independent contractor misclassification issues and many other consequences that come with it.

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