IRS Clamps Down on Companies that Misclassify Workers

IRS Clamps Down on Companies that Misclassify Workers

In an effort to close the tax gap and ensure full compliance with federal tax law, the IRS is focusing more closely on business tax returns and, specifically, the way in which companies classify workers. The agency has been cracking down on businesses that misclassify workers as independent contractors rather than employees, and the penalties for doing so can be steep. In many cases, hiring independent workers can be more cost-effective for companies. Companies are not required to withdraw payroll, Social Security and Medicare taxes, provide benefits or pay unemployment insurance. However, if the IRS determines that employers have incorrectly labeled workers, they may be forced to pay up to 100 percent in payroll taxes owed to the IRS, according to Fox Business.

Currently, the IRS has audited or is in the process of auditing 6,000 companies in the crackdown mission, the news source reports. The IRS estimates that at least 30 percent of workers are currently misclassified, and resolving this issue could yield as much as $7 billion in revenue, Fox Business adds.

Because the IRS has a strong financial incentive in cracking down on misclassified workers, it’s important that companies know the difference between who qualifies as a contractor versus and employee. For example, workers who set their own schedules, utilize their own tools to complete a job and provide services to other businesses are generally classified as independent contractors and should be issued 1099 forms, rather than W-2s. However, when companies control or have the right to control what the worker does and how the worker does his or her job, as well as how they paid, the hours they work and the benefits they receive, individuals may fall under the employee classification.