Avoid the costly mistake of misclassification

This tip in as a Special Alert from fellow-attorney, James Montgomery, and CPA, Charles Dangerfield, regarding an issue that employers can get into trouble with – the misclassification of an employee as an independent contractor.  To help with the issue, the IRS has developed a new Form 8919 that is now available for taxpayers to file with their Form 1040.  The form is for uncollected social security and Medicare tax that employees who believe they have been misclassified as an independent contractor by an employer can submit to the IRS.

The advantages enjoyed by a business in classifying a worker as an independent contractor are disadvantages for the IRS and state agencies that administer tax collection programs. The IRS has an interest in businesses putting workers on payroll to better ensure the collection and withholding of payroll taxes.  States want employers to pay workers’ compensation premiums and unemployment insurance.  As a result, the IRS and the states have a big stake in ensuring that businesses do not misclassify a worker as an “independent contractor” when in fact they should be on payroll.

Bottom line - misclassifying a worker can be costly.

State and federal agencies can conduct costly and time-consuming audits and impose back taxes, penalties, and interest on employers who misclassify their employees as independent contractors.  If you do make the decision to hire an independent contractor, make sure they’re correctly classified by consulting with your counsel of choice for assistance in making that classification decision.  In addition, get a written agreement and, if appropriate, make certain the contractor is insured to reduce your potential risks.