Employees vs. Independent Contractors: The Consequences of Misclassification
The distinction between independent contractors and employees carries more burdens, consequences, and decisions than ever before. In addition to the tax consequences, there are health care compliance consequences, workers’ compensation consequences, and even intellectual property consequences. Understanding the consequences of misclassification is paramount to properly structure an employer’s workforce.
The most direct and obvious consequences of failing to properly classify workers are tax related. There are specific payroll taxes that employers partially pay — and also withhold — for employees, including FICA andunemployment.. Employers will be liable for these taxes on all workers that the IRS ultimately classifies as employees, as well as penalties for failure to deposit payroll taxes in a timely manner.
The Patient Protection and Affordable Care Act (“ACA”) raised the stakes for employers who misclassify employees. The ACA requires employers with 50 or more full-time employees to provide affordable, employer-sponsored health insurance. Employers near this threshold may be tempted to either restructure worker duties or reclassify employees as independent contractors to avoid ACA requirements. Unless the classification of the worker is beyond reproach, however, employers should avoid this approach. The penalties for failing to comply with the ACA are high; to-wit:$166.67 per month per the number of full-time employees (after the first thirty employees). Employers should exercise great care when structuringtheir workforce to ensure compliance with the ACA.
Similar to the ACA considerations mentioned above, proper classification of employees is incredibly important in light of workers’ compensation insurance. The failure to provide workers’ compensation insurance can be costly, particularly if an injured worker classified as an independent contractor was actually an employee.
This issue was thoroughly discussed in another recent McBrayer post, but copyright interests in works created by an employee generally belong to the employer, while copyright interests in works created by an independent contractor generally do not. Employers should be very wary over signing agreements with independent contractors concerning copyrighted works, as statutory language can trump contract provisions.
If an employer has any concerns about how an employee or independent contractor is classified, the employer can request a determination from the IRS. While this determination, requested with Form SS-8, is ostensibly for the purpose of determining employment taxes and income withholding, this determination will at least provide guidance as to what side of the line workers fall. The IRS also administers the penalty implications of the ACA, so an IRS determination may definitively settle the matter in certain areas.