Misclassifying Employees as Subcontractors Can Land You in Jail

Misclassifying Subcontractors Employees Can Land You in Jail

Misclassifying Employees as Subcontractors Can Land You in Jail

Not following the IRS rules for classifying employees vs. independent contractors can have disastrous ramifications for your business and you personally. The U.S. economy is rapidly changing with an incredible 40% of all U.S. workers now classified as contingent or temporary according to a 2015 US Government report. The U.S. is seeing on-demand companies such as Uber losing lawsuits over worker status and Homejoy closing it’s doors trying to deal with various work status related class-action lawsuits.

With the massive rise in temp workers, the IRS, state tax, and labor departments are looking into classifications with more scrutiny than ever. In 2014, $10.2 million was awarded to 19 states to help fund their clampdown on independent contractor misclassification, with four states receiving “high-performance bonuses” due to improved detection of worker misclassification. Maliciously misclassifying your employees as independent contractors can lead to expensive judgments and even jail time.

Here are two real-world

Examples of Increased Government Oversight and the Resulting Punishment:

What the IRS Considers an Independent Contractor vs. an Employee?

  1. Instructions:

    If the person for whom the services are performed has the right to require compliance with guidelines. This indicates employee status.

  2. Training:

    Worker training indicates that the person for whom services are performed wants the functions performed in a particular manner (which means employee status). An example is by requiring attendance at training sessions

  3. Integration:

    Integration of the worker’s services into the business operations of the person for whom services are performed is an indication of employee status.

  4. Services Rendered Personally:

    If the services are required to be performed personally, this is an indication that the person for whom services are delivered is interested in the methods used to accomplish the work (which indicates employee status).

  5. Hiring, Supervision, and Paying Assistants:

    If the person for whom services are performed hires, supervises or pays assistants, this generally indicates employee 3 Treas. Reg. sec. 31.3401(c)-(1)(b). 4 Id. See also, Gierek v. Commissioner, 66 T.C.M. 1866 (1993) (involving the classification of a stockbroker and stating that the key inquiry is whether the brokerage firm had a right to control the worker regardless of the extent to which such control was exercised).See also, IRS Publication 1779 (Rev. 1-2005). 5 Rev. Rul. 87-41, 1987-1 C.B. 296 (guiding section 530 of the Revenue Act of 1978). Four status. However, if the worker hires and supervises others under a contract under which the worker agrees to provide material and labor and is only responsible for the result, this indicates independent contractor status.

  6. Continuing Relationship:

    A continuing relationship between the worker and the person for whom the services are performed indicates employee status.

  7. Set Hours of Work:

    The establishment of set hours for the worker indicates employee status.

  8. Full Time Required:

    If the worker must devote substantially full time to the business of the person for whom services are performed, this indicates employee status. An independent contractor is free to work when and for whom he or she chooses.

  9. Doing Work on Employer’s Premises:

    If the work is performed on the premises of the person for whom the services are conducted, this indicates employee status. This is especially true if you can perform elsewhere.

  10. Order or Sequence Test:

    If a worker must perform services in the order or sequence set by the person for whom services are performed, that shows the worker is not free to follow his or her pattern of work and indicates employee status.

  11. Oral or Written Reports:

    A requirement that the worker submits regular reports indicates employee status.

  12. The Payment by the Hour, Week, or Month:

    Payment by the hour, week, or month generally points to employment status; payment by the job or a commission indicates independent contractor status.

  13. The Payment of Business and Traveling Expenses: 

    If the person for whom the services are performed pays expenses, this indicates employee status. An employer, to control the costs, generally retains the right to direct the worker.

  14. Furnishing Tools and Materials:

    The provision of vital tools and materials to the worker indicates employee status.

  15. Significant Investment:

    Investment in facilities used by the worker indicates independent contractor status.

  16. Realization of Profit or Loss:

    A worker who can realize a profit or suffer a loss as a result of the services is generally an independent contractor. The services are in addition to profit or loss ordinarily realized by employees.

  17. Working for more than One Firm at a Time:

    If a worker performs more than de minimis services for multiple firms at the same time, that generally indicates independent contractor status.

  18. Making Service Available to the General Public:

    If a worker makes his or her services available to the public on a regular and consistent basis, that indicates independent contractor status.

  19. Right to Discharge:

    The right to discharge a worker is a factor indicating that the worker is an employee.

  20. Right to Terminate:

    If a worker has the right to terminate the relationship with the person for whom services are performed at any time he or she wishes without incurring liability, that indicates employee status.

Paragon Financial understands the intricacies of the IRS with over 24 years of experience.

Apply Securely, call 888-400-5931 ext 1 or email us.

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