Employment misclassification costs

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It’s no secret employers want to get the most out of their employees. Sometimes that means not counting them as employees.

By listing workers as contractors, a business doesn’t have to pay the employer portion of payroll or unemployment taxes. Neither does it face benefit costs for the workers.

Most businesses correctly classify workers as employees or contractors. But the Internal Revenue Service and Department of Labor keep an eye on companies because worker misclassification does happen. And while that’s not against the law, it is associated with labor and tax law violations.

Just last week, federal labor investigators recovered $787,548 in back wages for 124 employees who performed work on a federally funded project at the Nissan plant in Smyrna, Texas.

“The misclassification of employees as independent contractors is unacceptable, and something we see all too often in industries that employ vulnerable workers and in which we’ve historically found significant wage violations,” said Nancy J. Leppink, deputy administrator of the Labor Department’s Wage and Hour Division. “Honest employers who play by the rules have a difficult time competing against scofflaws who gain an advantage by underpaying their workers. And workers and their families lose when they are denied the wages they rightfully deserve.”

Look for more such crackdowns as the U.S. Department of Labor, IRS and state labor departments increasingly share information about worker classification. The coordination of efforts came after a 2009 Government Accountability Office report found that Uncle Sam was losing billions in unpaid payroll taxes and that up to 30 percent of firms audited in nine states in 2000 misclassified at least some employees.

The IRS also launched a new program in September 2011, the Voluntary Classification Settlement Program, to encourage employers to properly reclassify workers that they have been incorrectly carrying as contractors.

This employment misclassification amnesty lets companies get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit and possibly facing much higher unpaid taxes and penalties.

While federal investigators focus on companies in their efforts to ensure that all workers are appropriately listed on payrolls, workers who believe they are misclassified also have some recourse.

Why would a worker want to risk a paying job by turning in a boss?

Well, if you’re doing a job as an employee — the primary indication here is that your boss has control over how and where you work — your employer should be splitting FICA tax payments with you. As a contractor, you have to pay the full Social Security and Medicare taxes yourself, as well as make estimated tax payments to cover the income tax withholding that comes out of employee paychecks.

And, of course, there are the benefits that employees get.

If you believe your employer is improperly listing you as a contractor, try talking to your boss first. If he insists on paying you as a contractor, you can ask the IRS to review your case by submitting Form SS-8. The IRS will then look into your employment situation, including contacting your boss to get his version.

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