Misclassification of workers has long been a topic of the federal and state unemployment agencies.   When workers are misclassified as independent contractors as opposed to an employee, the federal and state agencies loses revenue and the ability to protect and ensure the individual. Often, the incorrect classification is given to an individual at the time of hire; however, the payroll department is usually the first to be notified and required to take prompt action. Most misclassifications occur in error.   Each state has legislation detailing the classification of workers.

Although Worker Classification Audits have existed for decades, we are expecting a sharp increase due to the passage of Public Law 113-76, the Consolidated Appropriations Act of 2014. Grants totaling $10,000,000 were set aside to be awarded to the state agency for assistance in improving their systems to enable them to share and analyze data between the federal and state level, implement targeted audit strategies to focus on employees most likely to be misclassified, establish state-wide task force to target worker misclassification schemes and provide education and outreach programs for employees to prevent their misclassification.

Each state has been notified through a Memorandum of Understanding regarding the guidelines of the funds and how to apply.   Every state can receive up to $500,000. A later distribution may occur if there are surplus funds.   State agencies must obligate the funds by September 30, 2016, or forfeit the funds. Eighteen states are currently approved: Alabama, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Utah, and Washington. For more information regarding Program Letter No. 18-14, go to http://wdr.doleta.gov/directives/corr_doc.cfm?docn=9905.

In most cases, the payroll department is notified of the audit and then passes it to the Human Resource department. If the audit reflects a misclassification of workers, the payroll department will file amendments to their quarterly contribution returns and pay contributions and any penalties that are assessed. Credit for the additional contributions, depending on the time frame, may or may not be used in the re-computation of a tax rate notice.

A list of twenty questions was established by the IRS to help employers determine if an individual is an independent contractor and can be found as a PDF at the following link: http://www.namb.org/Images/namb/GovernmentAffairs/IRS20PointList.pdf. If “no” applies to questions 1-16 and “yes” applies to questions 17-20, more than likely, the independent contractor classification is correct, although not guaranteed. Each state possesses its rulings on independent contractors, although most states are similar.

If you have any questions, please contact your CCC Tax Analyst.


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