Employers face an important decision in classifying their workers for tax treatment. Workers can be classified as employees, who receive Form W-2, Wage and Tax Statement, or as independent contractors, who receive Form 1099-MISC, Miscellaneous Income. There are decision criteria to help businesses properly classify their workers, but businesses have incentives to classify their workers as independent contractors. When workers are classified as independent contractors instead of employees, businesses don’t have to pay employment taxes and costly employee benefits, or comply with myriad employer rules. In the next several years, businesses will have another reason to misclassify workers. In 2015, when the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, is fully implemented, businesses with 50 or more employees will be required to provide health insurance to employees to avoid a penalty. That penalty could be as high as $3,000 per worker. Businesses wanting to avoid the employer mandate to provide health insurance will have further motivation to classify workers as independent contractors. The IRS has a big stake in proper worker classification. When workers are classified as independent contractors and should be employees, the government loses out on employment tax revenue. In the last quantifiable study done on worker misclassification, for tax year 1984, the U.S. Government Accountability Office estimated that 15% of employers misclassified 3.4 million workers as independent contractors, costing the federal government $1.6 billion. The current amount lost is unknown, but the IRS is completing a study that will help quantify the extent of the problem. Results of this study are due in 2015.
Posted on: Tue, 17 Sep 2013 19:16:19 +0000
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