Misclassified Workers Can Be Costly For Your Business

Most of the time if a business owner makes a wrong call or a mistake in his business; it can be fixed or smoothed over relatively easily. That isn’t the case when making an error in classifying a worker as an employee or an independent contractor. Just like every other choice has a consequence, choosing the wrong worker classification can have dire financial consequences for your business. That is one reason to use a payroll service for your company.

The Internal Revenue Service (IRS) takes this issue very seriously, and in fact, it has circulated a notice saying they have doubled the number of auditors for the sole purpose of identifying misclassified workers. Here at The Payroll Department, we know the penalties in interest and fines can be horrific.

If you classify an employee as an independent contractor – and don’t have what the IRS calls “reasonable basis” you may be liable for payroll taxes for that worker. And when that is determined, the IRS may calculate the taxes, fines and fees retroactively.

If you have a “reasonable basis” for the worker classification, you may be able to get relief for the employment taxes. That requires filing all the necessary federal information returns for that worker. And, you cannot have treated any other worker holding the same capacity position differently going back to 1977.

Workers who feel they are a misclassified worker being treated as independent contractors instead of as employees can file a Social Security Tax form to report the employee’s share of the uncollected Social Security and Medicare taxes from their wages. This will probably trigger an IRS audit for the employer.

Treating workers as independent contractors provides a cost savings. If a worker is an independent contractor, employers don’t have to

  • withhold and pay income taxes
  • withhold and pay Social Security and Medicare
  • pay unemployment taxes
  • be burdened with the benefits of employees such as health insurance, retirement accounts, paid time off for illness, vacation or bereavement.

However, the costs of misclassifying a worker can wipe out those savings and cost a great deal more.

Staying on top of the laws and regulations and abiding by them is easiest when you use a payroll service provider. Here at The Payroll Department, we keep up with changes or news and let our clients know of anything coming that could impact employers’ payroll and business. We take the worry out of payroll for entrepreneurs; that lets them spend their time and energy on building their business.

-Elaine of The Payroll Department Blog Team

Posted in: Operating a Small Business, Payroll, Payroll Processing, Rules, Regulations and Laws

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