The core of the problem is that the IRS is convinced that Independent Contractors are NOT paying their fair share of taxes. The IRS has estimated that in 2001 "sole proprietors" - people such as Independent Contracts failed to pay $81 billion in taxes they owed. The Government Accounting Office, the investigative arm of Congress, has estimated that 38 percent of employers examined by the IRS have misclassified workers as Independent Contractors, and they are eager to collect that money by targeting companies for audits; especially where there are suspicions of misclassifying employees. Recent studies have indicated that more than half of the 9 million individuals currently working as Independent Contractors are misclassified and are actually working like employees with their clients.
A new report released in December, 2004, jointly by the University of Massachusetts' and Harvard University's schools of Law and Public Health has found that thousands of Massachusetts workers have been found to be wrongly classified as self-employed or Independent Contractors by employers seeking to lower costs, according to a recent report. Researchers found that 36,531 Massachusetts employers misclassified up to 248,000 workers, costing the state $152 million in uncollected income tax revenue. Also, $35.1 million in unemployment insurance taxes were lost.
Misclassification can take many forms. The 20 questions have been routinely used by the IRS to show how much control a company has over a worker's performance. The more control applied by the company, the more likely the Independent Contractor will be shown to be actually an employee and an audit may ensue. In January 2003, Hewlett-Packard was accused of exploiting temporary workers by forcing them to work overtime without pay or benefits and were unfairly and illegally classified as independent contractors even though they were treated the same as other full-time employees.
What is the consequence of not being in compliance with the IRS regulations employee classifications? Fines, penalties and interest charges by both the IRS and State authorities can be staggering. If your company makes the wrong decision, an IRS audit could conclude that you come up with back taxes, provide retroactive benefits, including vacation pay, stock options, and 401(k) contributions, and pay stiff financial penalties.
ICon has been working in the contingent workforce management sector for many years. Provide us with the opportunity to help protect your company's workforce investment by ensuring that you are meeting all federal and state guidelines. Please contact us today to determine which of our solutions are best for your organization.
