Revisiting worker classification, part 1: employers and compliance concerns

Worker classification and its connection to payroll taxes is a thread we have been following for quite some time in this blog.

In the last few years, tax authorities have put considerable pressure on employers regarding the possible misclassification of employees as contractors in order to avoid payroll tax obligations. As we noted in our January 15 post, one option for employers in this situation is to voluntary reclassify certain workers as employees.

In this two-part post, let’s update the story by refreshing your memory about the basic issues.

First of all, it’s important to realize that the stakes are high. Government revenue agencies miss out on a lot of money when employers don’t have to pay employment taxes.

That is why, as a press account noted this week, the number of audits by revenue agencies looking to nail employers for worker misclassification is increasing. The number is increasing even though four years have gone by since Congress received a special report from its research service estimating the extent of the revenue lost to misclassification.

Moreover, when authorities go looking for classification problems, they often find them.
And this can lead to significant tax penalties against the employers. The implementation of the Affordable Care Act has added yet another level of concern and possible penalties to an already challenging compliance landscape for employers.

Another challenge is that the legal test for distinguishing contractors from employees is by no means crystal clear. In part two of this post, we will explain why.