Risky Business: Playing Fast and Loose with Worker Classification

Risky Business 1920 Silent Film With Gladys Walton

Risky Business 1920 Silent Film With Gladys Walton

In light of the IRS’s fairly recent Voluntary Worker Classification Settlement Program (VCSP) issued in 2012, employers need to consider the benefits and risks of their current classification of employees as independent contractors. This window of opportunity is only available before the IRS or Department of Labor initiates an examination.

Small companies and businesses of many sizes have classified their workers as independent contractors and not employees to gain the following illegal advantages and savings:

  • Avoid paying payroll taxes including Social Security, Medicare, Unemployment, and Federal tax withholding.
  • Avoid having to pay for medical insurance.
  • Avoid making payments of contributions into employer retirement plans.
  • Obtaining services at a fixed rate, no matter what the time required to complete the assignment.
  • Reducing employee record keeping, clerical and other administrative cost savings.

These tempting advantages have created a tremendous incentive for employers to classify workers as independent contractors when they are truly employees.  The IRS has warned that it is stepping up its policing of this area.  Here are some of the costs and penalties employers face if caught by the IRS:

  • Payroll tax liability, plus significant penalties and interest.
  • Various civil and criminal sanctions brought by the IRS, including fines and imprisonment.
  • Retirement plan disqualification or remediation and penalties.  If these workers were wrongly excluded from coverage under any and all retirement plans, such plans would not meet certain plan qualification tests and could be disqualified.  In the alternative,  the employer would have to go through an IRS plan remediation application and pay various penalties and costs to salvage the plan. For more details on plan remediation see Failing To Update Retirement Plans: Avoid Plan Disqualification & Penalties By Using the VCP Program
  • Personal liability for corporate officers of up to 100% of the amount the employer should have withheld from the employee’s compensation in payroll taxes.  Section 6672 imposes personal liability on officers, shareholders and board of directors as “responsible persons.”  For more details read Personal Liability For Corporate Employment Taxes.
  • Legal fees, the lost time spent litigating this matter and the related out-of-pocket costs of litigation.  In these cases, payments to accountants and other experts are necessary for the attorney to prepare for the case and for such experts to appear in court. Even if the case avoids full-blown litigation, legal fees and out-of-court settlement fees will result.

A battle with the IRS is only part of the employer’s problem.  Additionally, a disgruntled or vengeful worker can make real trouble for the employer by making the following claims against the employer:

  • Medical coverage:  If the employer had medical plans for its other employees, these excluded workers may make claims for lack of coverage.
  • Retirement Benefits:  For all the years in which they were erroneously treated as independent contractors, such workers may demand to have contributions made to the employer’s profit-sharing, 401(k), pension or other retirement plan.  This could be a very large liability if the claim involves multiple employees over multiple years.
  • Other Fringe Benefits: In addition to retirement plans, workers may demand stock options, disability payments, workers’ compensation and any other fringe benefits being offered by the employer to its other employees.
  • Overtime Pay:  These workers would be entitled to overtime pay under the Fair Labor Standards Act if the hours he or she provided to the employer in the past exceeded the standard workweek.
  • Unemployment claims.  For those workers erroneously treated as independent, they may assert a claim to collect unemployment for past employment.
  • Lawsuits:  Lawsuits brought against the worker may trigger legal action against the employer to hold the employer legally responsible.

Where the worker seeks reclassification and complains to the authorities, the IRS or the Department of Labor may then get involved by auditing the employer  on how it classifies all of its independent contractors. A full-blown audit could result in economic disaster or ruin for an employer.

Bottom Line:  Any employer playing fast and loose in this area needs to look at their employment practices very carefully.  For determining whether a worker is truly independent please read my article Employee or Independent Contractor?  Finally, see Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean for the details and qualification requirements for coming within the IRS’s Voluntary Worker Classification Settlement Program (VCSP).

The key here is to get with your tax attorney to review your situation and take advantage of the VCSP before the IRS comes knocking on your door.

About these ads

19 responses to “Risky Business: Playing Fast and Loose with Worker Classification

  1. Pingback: Risky Business: Playing Fast and Loose with Wor...

  2. Pingback: Playing Games With Employees: IRS May Come Knocking | Philadelphia Estate and Tax Attorney Blog

  3. It’s hard to come by educated people for this subject, but you sound like you know what you’re talking about!
    Thanks

  4. You really make it appear so easy with your presentation but I in finding this topic to be actually one thing that I feel I might never understand.
    It sort of feels too complex and extremely extensive for me.
    I’m looking forward in your subsequent put up, I will attempt to get the grasp of it!

    • Well, in a way, you are exactly right; it is hard to fully understand all this stuff and it is complex. But that is the point in that readers should get professional help when it comes to such matters. So your honesty is probably what most people are thinking anyway. Guys like me are out there to help people like you, where the complexities and tax exposures are too great to be ignored.
      Please sign up for updates by leaving your email address in the area in the upper right hand corner. Thanks for stopping by.

  5. Howdy I am so happy I found your webpage, I really found you by accident, while I was browsing on Digg for something else, Anyhow I am here now and would just like to say thanks a lot for a fantastic post and a all round thrilling blog (I also love the theme/design), I don’t have time to read through it all at the moment but I have saved it and also added in your RSS feeds, so when I have time I will be back to read much more, Please do keep up the excellent job.

  6. I’m extremely impressed with your writing abilities and also with the layout on your blog. Is that this a paid theme or did you modify it your self? Either way keep up the nice quality writing, it is uncommon to look a great blog like this one these days..

  7. You have made some decent points there. I checked on the net to find out more about the issue and
    found most people will go along with your views on this web site.

  8. I feel that there is so much significant information and insights from this article. I’m really going to study and learn from your article. The site style is very well done and the other articles are very informative.
    D. Good process, cheers.

  9. Hi I am so excited I found your blog page, I really found you by error, while I was searching on AOL for something else, Nonetheless I am here now and would just like to say kudos for a tremendous post and a all round thrilling blog (I also love the theme/design), I don’t have time to go through it all at the minute but I have saved it and also added your RSS feeds, so when I have time I will be back to read more, Please do keep up the excellent job.

  10. Pingback: Changes In IRS IOC Settlement « Tax Debt Settlement

  11. Pingback: Online Penny Stocks - Looking for day trading for dummies? Here's information for you! - Day Trading For Dummies

  12. Pingback: When War Comes Knocking… | ufo-tv.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s