Contractor v. Employee – A Big Problem and a Big Expense

Posted by Jeffrey Siegel on October 8, 2014

Contractor v. Employee – A Big Issue and a Big Expense

(From Accounting Today)

One of the efforts states are making to increase their revenue stream is to tighten up their enforcement of worker misclassification.

Now, the U.S. Department of Labor is helping them in this by awarding $10,225,183 to 19 states to implement or improve worker misclassification detection and enforcement initiatives in unemployment insurance programs. “This is one of many actions the department is taking to help level the playing field for employers while ensuring workers receive appropriate rights and protections,” said U.S. Secretary of Labor Thomas E. Perez. “[These] federal grant awards will enhance states’ ability to detect incidents of worker misclassification and protect the integrity of state unemployment insurance trust funds.”

The funds will be used to increase the ability of state UI tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report the wages paid to workers at all. The states that were selected to receive these grants will use the funds for a variety of improvements and initiatives, including enhancing employer audit programs and conducting employer education initiatives.

While several states have existing programs designed to reduce worker misclassification, this is the first year that the Labor Department has awarded grants dedicated to this effort. The Consolidated Appropriations Act of 2014 authorized this grant funding for “activities to address the misclassification of workers.”

Under a “high-performance bonus” program, four states —Maryland, New Jersey, Texas, and Utah—will receive a share of $2 million in additional grant funds due to their high performance or most improved performance in detecting incidents of worker misclassification. The remaining $8,225,183 was distributed to 19 states in competitive grants. The maximum grant available under the competitive grant award process was $500,000.

Misclassification of workers can mean not only that your client is liable for back payroll taxes, but it can also generate professional liability claims against the accountant.

“Many times accountants are not familiar with the independent contractor/employee distinctions, and the IRS, the DOL or the Workers Compensation Board comes in and says they’re employees, not independent contractors,” said John Raspante, senior vice president and director of risk management for NAPLIA (North American Professional Liability Insurance Agency).

“The rules are complex,” said Raspante. “And they are subject to multiple reviews — the IRS, the DOL or the state workers compensation board can dispute the status of a worker. The IRS is very successful in these types of examinations. It’s very common for them to reclassify independent contractors to employees, and the claim that arises can be very material.”

“It’s more of a legal distinction, but practitioners get roped into making decisions or calculations,” said Randy Werner, a loss prevention executive at Camico. “If they get it wrong, it can be very costly.”

“For several years the DOL and the IRS and 40-plus states have had an information sharing agreement,” he noted. “When one of them audits a business on this issue they share the results with the other two. It’s a triple whammy—when you settle with one of them, you might mistakenly think it’s the end of the matter. In reality, that’s just the beginning—you still have two other wars to fight.”

If you have a client with this common issue, or who owes taxes to the IRS or state, call Jeffrey R. Siegel, your Kansas City Tax Attorney at (913) 735-4829.