IRS Aims to Fix Misclassification of Workers Problem

One of the biggest problems affecting the IRS, U.S. Department of Labor and state governments is the misclassification of workers. Improper classification of workers as independent contractors costs the government tax revenue, in the form of lost withholding, unemployment, workers’ compensation, and Social Security and Medicare taxes. It’s unclear exactly how many workers are unclassified, but a recent MBO Partners study found that 16 million workers are classified as independent contractors. Independent contractors are attractive to many businesses because they are about 30% cheaper than employees and come without many of the burdensome employment rules.

To combat the growing problem, the IRS is stepping up its worker reclassification efforts and creating a program that will quantify levels of misclassification and reveal significant noncompliance.  Employee status is even more important with the passage of the Patient Protection and Affordable Care Act, as some employers may try to reduce payrolls by treating workers as independent contractors, rather than employees.

Over the years, the IRS has tried to simplify determination of worker classification but has met little success. Employee safe harbors and enforcement stalemates have tampered with classification efforts and slowed down the process. However, there are several things you can do for clients to identify risks and reduce exposure:

• Review Form 1099 recipients for proper classification.
• Review workers who received From W-2 in the past but are now treated as contractors.
• Review your client’s vendor list, check register, and account payable to determine whether your client filed a form 1099 or W-2.

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