What exactly is employee misclassification?
Many businesses don’t even know this problem exists. Unfortunately this misclassification is more than just a filing error and should be rectified immediately! Fortunately there is a very simple solution for small businesses which I will cover later in the article.
Employees are considered misclassified by the IRS and states when they are classified as 1099 (independent consultants) by the company but are in actuality ‘employees’ of the firm. Most companies
don’t classify them incorrectly maliciously. Rather they try to hire new employees for small projects and not for full time, but don’t fully understand what the rules of the working relationship between independent consultants and the firm that employs them are. The independent consultant needs to remain independent of the company. Small things like where he works, what he wears, and even for how long the project lasts can affect his classification. Furthermore, the classification of the worker isn’t clear cut and simple. It’s open to interpretation by the IRS and States. They have a 20 question test which is used as a guideline for them to classify the workers. Here is a summary of the questions.
The main benefit for hiring a worker on a 1099 basis for the company are the tax liability benefits. When a company hires a traditional employee they are responsible for paying the employer side of taxes. By hiring them as an independent contractor they pass along that responsibility to the contractor. Whether the independent consultant pays his quarterly estimated taxes properly is his responsibility not the company’s. The problems with misclassification arise when the IRS or state agencies audit your company and determine that the independent consultant you hired for the project was technically your employee all along. The fines can be hefty as in the case of Vizcaino vs. Microsoft where Microsoft settled for over $97 million.
The solution for this problem sounds easy, only hire workers on a W-2 (traditional employee) basis. However many firms don’t want to pay the consultant’s high fees and the employer side of taxes. In order to get around the risk of employee misclassification and without taking on more responsibilities many companies are turning to iamindependent.com and their new business model. This company acts as the employer of record which completely eliminates the risk of co-employment. The company also provides many valuable benefits normally unattainable by 1099’s. These benefits could be used to further entice consultants to come work with your company.
To learn more about how you can eliminate co-employment risk or our business model contact us.