Worker Classification Issues
The Taxation agencies and Department of Labor agencies, on both the federal and state levels, have been working to reduce worker misclassification in the workforce. However, it is still a common problem. Whether done unintentionally due to a misinterpretation (or misunderstanding) of the numerous federal and state laws defining worker classification, or done intentionally to avoid the extra paperwork, regulatory issues, payroll taxes, and other expenses, worker classification errors can cause financial and legal headaches for employers and workers alike. As such, whether you are an employer or a worker, it is important to understand worker classification and how it impacts you.
For workers, being incorrectly treated as an independent contractor instead of a W-2 employee means paying more in taxes since you would have the burden of paying not only your income tax and the employee portion of the Social Security and Medicare taxes but you must also pay the employer's portion, too. And, you may miss out on benefits such as overtime wages, health insurance, paid sick and vacation time, and workers compensation.
For employing businesses, knowing how to classify workers can be a challenge because the various federal and state agency tests do not perfectly align. Problems can arise even when the business and the worker agree to an independent contractor classification and memorialize their agreement through an executed contract. While incorrectly classifying workers as independent contractors may initially reduce payroll and benefit expenses, the error may ultimately become very costly. If caught, the government will not only require the business to come into compliance with the unpaid taxes but will likely assess penalties and interest as well. Furthermore, certain business officers and employees may also be at risk of being held responsible for the unpaid employment taxes through a trust fund recovery penalty if the business fails to pay. Criminal penalties may be imposed in serious cases.
The Law Office of Cheri P. Wendt-Taczak, LLC helps businesses and workers to understand and resolve worker classification and related tax issues.
If you want help resolving a worker status problem, contact us.