Are You Prepared for an Audit on Worker Classifications in Your Organization? 1099 vs. W-2
The Department of Labor and the IRS have started looking at worker classification with greater scrutiny. This is coming in the form of specialized audits that are focusing on independent contractors. By categorizing a worker as an independent contractor instead of an employee, it may save the employer payroll taxes and benefits in the short run.
However, if it is determined that a contractor is actually an employee in the eyes of the IRS, then it could subject the employer to back taxes of over 40% of the contractor wages, plus applicable penalties and interest for this misclassification. Also, the reclassification would make the independent contractor subject to other employee regulations, such as overtime pay requirements, minimum wage thresholds, and the Family Medical Leave Act provisions.
This is further complicated by the new reporting requirements of the Affordable Care Act (ACA). The ACA has additional annual information reporting requirements for each employee if an employer is deemed to be an Applicable Large Employer (at least 50 Full-Time Equivalents (FTEs)). Subsequent changes in a worker classification by the IRS/DOL could push an employer over the 50 FTE threshold, making the employer subject to the ACA filing and reporting requirement. Failure to timely file the additional information returns carries a penalty of $500 per employee. To help determine a worker’s status, the IRS has a 20 Factor Common Law Test to help businesses correctly classify their workers. To see the full list, please click here.
If you are unsure or have any questions about your workforce, BMSS is available to review your current worker relationships and help you determine proper classifications. If necessary, our professionals can also provide guidance or suggestions on what steps can be taken to correct any misclassifications that may be found.
If you have questions or would like to discuss this issue further, please contact your BMSS CPA.