Incorrect Worker Classification Leads to Tax Disputes

Running your own business can be pretty satisfying, and choosing the right people to join your team can make all the difference. But how you classify your workers matters. And incorrect worker classification can lead to tax disputes.

Worker Classification in Business

Employers have options: they can pay an employee with a W-2, or keep them at arms length by paying them with a 1099-MISC.

The latter option comes while working with independent contractors. They may work for you, but they’re not exactly an employee. Using independent contractors saves businesses the hassle of providing benefits and avoids paying additional taxes, but misclassifying them can lead to tax consequences down the line.

The IRS goes after employee misclassification hard. It’s because the money saved by employers in not paying employer taxes costs Uncle Sam money in lost tax revenue. The Labor Department, on top of ambitious class action attorneys, investigate worker misclassifications. If there’s back taxes owed, expect an IRS agent to get in on the mix, too.

The IRS’s SS-8 program helps employers and businesses determine whether their workers are employees or independent contractors. How? By submitting an inquiry.

While the program’s out there and available for use, not everyone is abiding by the IRS’s determinations. A recent report concluded that about 65 percent of employers that submitted SS-8 inquiries either ended their relationship with the worker in question, or just paid them under the table. This is leading the IRS and federal officials to zealously investigate worker misclassifications to acquire missing tax revenue.

More than 10 million Americans work as independent contractors. That’s about seven percent of the labor force. But if they’re misclassified, your business profits will be demoted to back tax payments.

Every business faces stumbles and trips down the road, but back taxes don’t have to be one of them. If your workers might be misclassified, working with a tax professional is the first step into getting them – and your business’s finances – on the right track.

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