The following is a guest post from IES’s President, Peter Limone:
Would you do your taxes without the help of a professional CPA? With today’s complicated tax codes, the answer is almost certainly no. Yet, many companies regularly engage in one of riskiest employment practices without professional guidance: hiring independent contractors.
Using 1099 workers can be a great way to maintain a flexible workforce, tap into a specialized talent pool, and save on labor costs. As long as you fill out the correct IRS forms, you’re good to go, right?
If only it were half that easy. With the increasing complexity of IRS guidelines, the risk of misclassification poses a real and significant threat. Just one innocent mistake can cost employers millions in penalties, back-paid taxes, wages and insurance. And unfortunately, most companies simply don’t have the time, HR expertise or due diligence to accurately evaluate whether a contractor meets 1099 guidelines.
In managing IC compliance services for our clients, IES has helped many of them avert common, but extremely costly, mistakes. Just look at the some of the major companies in legal hot water over misclassification issues:
- Pepperidge Farm is hit with a class action lawsuit, accused of misclassifying sales employees as independent contractors.
- Fed X is fighting in the Massachusetts courts, after drivers say they were wrongly classified as independent contract workers.
Government scrutiny of the use of contract workers is also on the rise. Enforcement continues to escalate as states look for ways to increase their tax revenues:
- On July 15, 2015, the United States Department of Labor issued a legal statement focusing on the classification, or in its eyes, the misclassification of workers as independent contractors rather than employees. The overall, very clear message? Most workers are employees, not independent contractors. See full article
- Another impact of misclassifying independent contractors? Your 401K plan could lose its tax tax-qualified status. Lexology discusses this very topic.
As you can see, it’s imperative to have a professional, reputable firm who specializes in IC compliance services. Here at IES, we offer our clients an in-depth service that covers all aspects of contract worker compliance: 1099 screening, classification and evaluation process – that significantly reduces the risk of costly classification errors.
But the best overall advice I ever got was from an instructor on Payroll Law, who said: “When in doubt, put them on the payroll.”
