According to a recent Treasury Department report, the IRS is cracking down on the misclassification of "independent contractors." The consequences could be costly for business owners who aren't too careful.
For employers, the advantages of classifying a worker as an "independent contractor" are clear: You don't have to withhold income tax and you don't have to offer them any benefits, just to name a few.
But the Treasury report estimates that "millions" of workers are misclassified as independent contractors, when they really should be considered employees. How can you tell the difference, and what's the big deal, anyway?
Cost of Misclassification
According to the report by the Treasury Department's Inspector General for Tax Administration, the misclassification of independent contractors means businesses are failing to pay as much as $1.2 million in federal taxes each year, The Hill reports. That works out to about $3,710 in employment taxes per misclassified worker.
For employers who are caught misclassifying workers, consequences can include hefty fines, not to mention being forced to pay back taxes to make up for years of misclassification.
What Factors Are Key?
As for the differences between an independent contractor and an employee, the Treasury Inspector General's report highlights three general factors to consider. They are:
The misclassification of workers as independent contractors is a recurring issue for many business owners. If you have questions about whether your workers are technically employees or contractors, it may be wise to consult an experienced employment lawyer near you.
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