small business articles

Properly classifying workers remains a major problem

From an August 2, 2017, online Accounting Today post

Worker misclassification is a perennial issue for the Internal Revenue Service and state taxing authorities due to the perception that many employers are not properly classifying their workers.

By avoiding labeling their workers as employees, employers also avoid paying minimum wages, overtime, payroll taxes, worker’s compensation, unemployment, Social Security contributions, health benefits, paid leave, 401(k) benefits and unpaid leave under the Federal Family and Medical Leave Act. And workers have some benefits to being considered independent contractors, such as the ability to deduct certain business expenses that are not available to employees, the ability to set up their own retirement plans, and the fact that they are not subject to withholding. Of course, many workers want to be considered employees so they can get the benefits due employees, such as vacation pay, overtime pay and health insurance.

It’s easy for an accountant to make a mistake because there is no bright-line test to judge whether a worker is an employee or an independent contractor. The IRS has used a 20-factor test based on common law principles, which it has also shortened into a three-part test focusing on behavioral control, financial control, and the relationship of the parties. The IRS still uses both tests, and states may follow the federal tests or have their own, more restrictive rules.

“Accountants may be unfamiliar with the distinction, and if the IRS or Department of Labor comes in and disputes the decision to label them as independent contractors, they can land in trouble,” said John Raspante, a CPA and director of risk management for CPA Protector Plan, a division of insurance intermediary Brown & Brown. “The rules are complex, and they are subject to multiple reviews,” he said. “The IRS, the DOL or the state workers’ compensation board can object to the status of a worker. The IRS has been successful in these situations, and the claim against the CPA can be significant.”

“It’s a hot-button issue with the IRS, and the DOL and state workers compensation boards are becoming more involved,” said Edgar Gee, a Knoxville, Tenn.-based CPA who specializes in employee classification issues. “They have agreements to share information. When you settle with one, you think it’s over, but it may be just beginning.”

If a business classifies a worker as an independent contractor and the worker is found to be an employee, the business is responsible for the taxes it failed to withhold, as well as the employee’s share, plus interest and penalties over the years the misclassification was claimed. “With several employees over several years, this can quickly become a nightmare,” said Gee.

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