In order to assure that workers are being classified correctly, the Department of Labor and the IRS are working together to pay close attention to cases involving determination of work status and issuing the correct penalty to employers.
When it comes to doing work for money, employers can classify workers as either employees or independent contractors (IC). These classifications have a significant impact on the costs an employer must take on, as well as the control an employer has over its workers. The main reason employers would try to classify an employee as an IC is due to taxes. According to an IRS publication from 2008-2010, “Federal employment withholding taxes represent nearly 70% of all federal tax revenue to be paid to the IRS, which seeks back taxes and penalties from employers that wrongly treat workers as self-employed contractors.” That being said, there are many actions in place when it comes to identifying which of these someone should be labeled as, responding to false classifications, and issuing penalties. With the rise in freelance services, this distinction is becoming more essential for society.
When it comes to defining whether someone should hold IC status or not, the DOL and IRS have several overlapping tests that will allow them to determine misclassification. While some states may have a different jurisdiction for working status, these tests are very thorough and effective at defining a general baseline. While these tests are truly impressive, and the DOL and IRS federal and state regulators are doing everything in their power to improve them daily, many professionals believe the simple approach of labeling everyone as an employee when status is not unquestionably apparent is the best approach.