From The CPA Journal, Frank Messina, DBA, Bruce P. Ely, Lisa-Ann Polack, and Marena Messina provide an excellent overview of the process, tests and penalties associated with misclassifying workers as independent contractors and they provide their recommendations in a comprehensive article. They write:
Classifying a worker as an employee or an independent contractor has a significant effect on the cost of employing that individual. For this reason, the IRS and Department of Labor pay close attention to worker classification issues to ensure that employers are making the right determinations. The authors detail the relevant regulatory guidance and case law, the possible penalties for offenders, and the tests used to determine whether a classification is correct.
* * *Intentionally or not, many workers in the United States are classified as independent contractors (IC). In classifying a worker as an IC instead of an employee, putative employers can eliminate the following expenses:
- The employer’s share of Social Security (FICA) and Medicare taxes
- Overtime and minimum wage payments
- Employee health insurance premiums
- Employee retirement benefits, vacation, holiday, and sick pay
- Other employee fringe benefits, such as stock options
- Federal and state unemployment compensation taxes (FUTA and SUTA)
- Workers’ compensation insurance premiums.
Federal and state regulators take this issue very seriously and have recently re-energized their efforts to challenge worker classification. Unreported or underreported employment taxes contribute to the overall federal tax gap (Tax Gap Estimates for Tax Years 2008–2010, IRS publication, http://bit.ly/2Lza1BM). Federal employment withholding taxes represent nearly 70% of all federal tax revenue to be paid to the IRS, which seeks back taxes and penalties from employers that wrongly treat workers as self-employed contractors. At the same time, and sometimes in partnership, the U.S. Departments of Labor and Justice and their counterparts at the state level are involved in ensuring that workers are properly classified by their employers, as is most recently evident in the rapidly growing “sharing” or “gig” economy created by various freelance service opportunities such as Uber, Lyft, and Grubhub.
Another relatively recent development is the increased interest in these issues by plaintiffs’ attorneys. Not a week goes by without a published report of a newly filed class action suit, or the certification or settlement of such a suit, against a putative employer by individuals who were classified as ICs but who believe they should have been classified otherwise (an excellent resource on these developments can be found at https://independentcontractorcompliance.com). Indeed, a new type of legal challenge has surfaced: a class action filed by one or more employers classifying their workers as employees against one or more competitors classifying their workers as ICs, unfairly or not [Diva Limousine Inc. v. Uber Technologies, Inc., Case No. 18-CV-05546 (N.D. Cal. Sept. 10, 2018)].
Read the full story at Employee Versus Independent Contractor – The CPA Journal