Hiring Freelancers: Does Your Business Comply?

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From Small Business Trends, Paul Chaney reviews the challenges of classifying workers and how it affect all parties and what are the compliance tests. Paul also offers recommendations to ensure compliance and what some of the consequences for misclassifying workers are.  Paul writes:

Employee Classification is Difficult

It may seem surprising that confusion exists over worker classification. After all, an independent contractor is someone who works for himself while an employee works for another party.

Unfortunately, things aren’t that simple. Lots of uncertainty exists in the regulatory environment.

“Where worker classification is concerned, no hard-and-fast criteria exists, despite the fact that the Department of Labor, National Labor Relations Board, IRS and a host of state labor-related agencies have their various interpretations,” said Jeff Wald, Work Market co-founder and president, in a telephone interview with Small Business Trends.

According to Wald, businesses need to be prepared in the event one of these agencies comes calling. And it’s not a matter of “if” the government will come calling, but “when,” he added.

“The IRS, DOL, worker’s comp or unemployment insurance boards, or even your insurance company could knock on your door wanting to understand how you engage the freelance workforce,” he said. “Should that happen, the burden lies on the back of the business owner to interpret the complex sets of rules and regulations and make the determination as to how his business will address it.”

Any way you look at it, misclassification of employees is a problem, and the burden of compliance falls to the business owner.

Consequences of Misclassifying Workers

The consequences of non-compliance can be tough and include fines, penalties, lawsuits and even jail time.

“Fines levied by the U.S. Department of Labor, IRS and state agencies for worker misclassification can exceed millions depending on the severity of the infractions,” Wald said in a post on TLNT, an HR industry blog. “The threat of class action lawsuits should also serve as a further deterrent for companies straddling the boundaries of improper classification.”

He added that trouble could come in many forms: Wage law violations, trouble with the IRS, I-9 violations, unemployment insurance shortfalls, worker’s comp violations, improper exclusion from benefits, anti-discrimination violations, FMLA violations, and much more.

Misclassification Fines and Penalties

Even if the misclassification is unintentional, the employer could still face the following penalties:

  • $50 for each Form W-2 that the employer failed to file because of classifying workers as an independent contractor;
  • 5 percent of the wages for failure to withhold income taxes;
  • 40 percent of FICA taxes that not withheld from the employee;
  • 100 percent of matching FICA taxes the employer should have paid.

Interest can also accrue on these penalties daily from the date they should have been deposited. The IRS can also impose additional fines and penalties if it suspects fraud or intentional misconduct.

The bottom line: Businesses can’t afford to misclassify.

Read the full story at Hiring Freelancers: Does Your Business Comply?

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