Worker Misclassification Now A Criminal Offense
In an environment where the federal and state governments are looking to cover budget shortfalls, the IRS and many states are looking at worker misclassification. Recently, the IRS started an audit program to look for violations in classification which could lead to steep withholding tax liabilities and penalties. Certain states, including Massachusetts, have made worker misclassification a criminal offense.
The most basic definition of an employee is someone who works full time, only for you, doing what you say, where, when and how you tell them to do it. An independent contractor has the right to determine where, when and how the work will get done, uses his/her own resources, and can work for others at the same time. Determining worker classification is not always easy, but it is important to note that misclassifying workers could lead to huge tax liabilities and penalties and it affects everything from benefits and retirement plan participation to worker’s compensation coverage and unemployment insurance.
To help make the contractor vs. employee determination, the IRS uses three general guidelines; 1) behavioral control, 2) financial control and 3) type of relationship. Ask yourself the following questions when making your assessment:
- Does your organization retain the right to tell the worker where and when to perform the work?
- Does your organization retain the right to direct the worker in how to perform the work and in what sequence?
- Does your organization mandate the use of certain equipment and provide that equipment to the worker?
- Does your organization provide training and instruction in how to perform the work?
- Does your organization reimburse workers for all expenses incurred in the performance of their work?
- Is the worker committed to working only for your organization?
- Does your organization provide benefits to the worker such as insurance, vacation/sick pay, offer participation in the retirement plan?
- Do you expect that the relationship will be ongoing rather than for a specific time period?
- Is the work being performed a key part of your regular business activity?
- Do you have other workers classified as employees performing essentially the same functions?
If you answered yes to any of the above questions, you have an employee, not an independent contractor. If you are still unclear, you may use IRS Form SS-8 to assist you in the evaluation process. In order to avoid incurring the consequences of an employment audit, organizations should proactively evaluate their worker relationships based on actual practices, and re-categorize workers as necessary in advance.
Anstiss & Co. is a Lowell- based public accounting firm serving clients throughout the United States. The firm was founded by Ray Anstiss, Sr. in 1964, and is currently listed as a Top-35 Accounting Firm in Massachusetts by the Boston Business Journal.
