The Cost of Misclassification of Independent Contractors

The misclassification of an employee as an independent contractor can create significant problems for your organization and its payroll service. As such, misclassifications represent large potential revenue losses for all levels of government. If an independent contractor faces tax problems, needs unemployment or needs disability benefits, the contractor has incentive to go back and claim he or she was an employee all along. It is then up to the employer to prove the individual is actually an independent contractor. If the employer is unable to prove that a worker is an independent contractor, it will cost the employer a substantial amount of money in employee benefits, state taxes, federal taxes and various penalties.

The DOL / IRS Crackdown

In the federal budget released in January 2012, the Obama Administration authorized funds for the U.S. Department of Labor to hire more investigators to “detect and deter” companies from misclassifying employees as independent contractors and failing to properly pay overtime or afford statutory benefits to workers. The DOL’s Misclassification Initiative will also allow state task forces to join the IRS in cracking down on organization’s that do not pay workers’ compensation, do not pay unemployment insurance premiums, or withhold taxes from workers whom the states believe are employees and do not qualify as independent contractors.

Could your organization survive an audit from the IRS?

A DOL study in 2000 found that as many as 30 percent of businesses misclassified employees as independent contractors. More recently, the Government Accountability Office determined that the number of misclassified workers has expanded by 50 percent in the interim. Hundreds of thousands of employers suffer exposure to considerable financial liability for non-compliance with respect to their employee benefit plans, existing state taxes, federal taxes and labor laws.

Payroll the way it should be – BASIC

Why take the risk? By outsourcing your payroll to BASIC, we classify your employees correctly from the start and avoid those pesky IRS penalties. We know that employee payroll processing and tax reporting can be the headache that never goes away for owners and HR Professionals. When you select BASIC for your Payroll & Tax Filing operation, you save time, money and paperwork. Meanwhile, you enjoy personal service from your dedicated payroll specialist who is simply a phone call away.

To learn more on The DOL’s Misclassification Initiative, visit:

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