This blog was last updated on June 27, 2021
With tax season well underway, some organizations may be scrambling to determine whether certain individuals they hired throughout the year were employees or independent contractors. If they are caught misclassifying workers, organizations can face serious legal actions.
According to AccountingWeb, this practice is not a problem that goes unnoticed. Nick Fortuna, partner at law firm Allyn & Fortuna, told the source its common for employers to find themselves in legal trouble. In fact, worker misclassification is a key topic in employment litigation at the moment.
“The liability is significant,” Fortuna told the source. “There are huge fines, and they’ll have to pay back taxes if they’re caught.”
Why employers misclassify workers
To be certain, worker misclassification is not always an act of willful negligence. In some cases, companies have a hard time making the distinction.
In other cases, companies don’t properly classify workers because they want to save money. When they designate employees as independent contractors, they don’t pay health insurance and other benefits including Social Security and Medicare taxes for these workers.
“It’s a lot less expensive to have someone as an independent contractor instead of an employee,” Fortuna said.
However, the IRS has published guidelines to help employers classify workers in the correct manner. And even in cases of nonwillful negligence, the agency may still impose penalties.
Why misclassification is on the rise
AccountingWeb pointed to the Great Recession as one reason why more employers are misclassifying workers, with the number of cases jumping 20-25 percent annually. Additionally, a 2013 report from the Treasury Inspector General for Tax Administration found the number of improperly classified workers reaches into the millions.
This high prevalence rate affects not only the federal government, but also local governments. With this in mind, it’s not surprising Virginia and other states have implemented tougher enforcement on worker misclassification. According to Virginia Workplace Law, the state’s lawmakers enacted the Virginia Workers Compensation Act, which imposed higher fines for employers that engage in the practice.
Although companies may think they’ll save money now, they must consider the possible costs from penalties for noncompliance. States and the federal government do their due diligence to identify misclassified workers, so companies must send the appropriate tax information to their workers this tax season.
