PPB March 2018

Ask These Nine Questions To Correctly Classify Workers by Andrew G. Poulos, EA, ABA, ATP 72 | MARCH 2018 | THINK H ow does a business determine if its workers are employees or independent contractors? This distinction is not as simple as most may think. The adage, “My workers are subcontractors because they pay their own taxes,” is not one of the 20 questions that the IRS or state labor agencies use to determine worker classification—and that defense would never carry any weight in an employment audit. In an era where worker misclassification and due diligence requirements are at an all-time high, business professionals must understand all the complexities. Improper classification not only carries a huge burden on the business, but can also have a significant impact on the worker. If the IRS determines employees were erroneously classified as independent contractors, the IRS may notify the workers that they are not entitled to deduct their business expenses from gross income on Schedule C and/or that they were not entitled to contribute to a retirement plan because they are not self-employed. When the IRS prohibits business expense and deduction claims for contributions to self-employed retirement plans, it can be very costly to the worker. In addition, when a business fails to properly classify its workers as employees, these individuals are unable to participate in benefit programs such as employer-provided health insurance. This issue, which usually arises after the fact, can catch workers by surprise and put them in a predicament that they may not be prepared to resolve. Yet, the consequences and impact on the business are far greater than those for the misclassified worker. Inmost cases, businesses categorize workers incorrectly due to lack of knowledge and understanding of the guidelines. However, in some cases themisclassification is clearly willful and negligent. There are only somany employment audits the IRS and state labor agencies can conduct, and when a business that is negligent goes through an audit, the consequences can be quite severe. For example, a willfully careless business that has misclassified its workers will not only be responsible for the tax liability, the penalty for improper classification and the penalty for failure to file returns, but it will also be responsible for 100 percent of the penalty for willful failure to collect tax. By the time the audit case is closed, a business may owe three times as much just for improperly classifying its workers. Independent Contractor Vs. Employee Status: How To Get It Right