Employers should be careful about how they classify workers, because if someone who the government would call an employee is treated as an independent contractor, it could result in a failure to withhold and to pay the Federal Unemployment Tax.

Any business that has arrangements with independent contractors should assess that relationship to make sure that those individuals truly are independent contractors. The U.S. Department of Labor’s Wage and Hour Division is set to pursue enforcement action against any business that does misclassify its workers. This comes at a time when many states are working to pay off debts to the federal government, incurred through loans to prop up unemployment funds. Chunks of the debt are paid off through employers’ unemployment taxes – payments which are also used to keep funds positive. If a company’s employees are misclassified as independent contractors, it is paying a disproportionate amount of unemployment tax.

This can become an issue, since the government may consider this a failure to pay federal taxes, and can punish employers for such a mistake with fines. Businesses have to assess theiremployees to determine whose wages are eligible for unemployment taxes.

Businesses could face fines for classifying employees as independent contractors. Businesses could face fines for classifying employees as independent contractors.

How to determine whether someone is an employee or an independent contractor
It is best to use the DOL’s interpretation of employment in determining whether an individual is an independent contractor or an employee. It is based on the Fair Labor Standards Act’s definition of the word employ: “To suffer or permit to work.” An entity – such as the employer – “suffers or permits” someone to work if, as a matter of economic reality, the individual is economically dependent on that entity. This can be determined through an “economic realities” test. This test consists of several parts:

Misclassification could lead to penalties, or worse
While no single part of this text will determine whether an individual is an employee or a contractor, all together the many factors can help employers come to a conclusion. Failure to pay federal unemployment taxes can lead to significant penalties. If the failed payment is found to be willful evasion, those fines could become felonies. If employers aren’t careful about how they classify workers, the government could come down on them with just these punishments or worse.

At Corporate Cost Control, we work closely with employers across the country to better manage the nuances of unemployment insurance. Legislation changes on the state level could impact you today, and we welcome any questions or concerns you may have on a wide range of topics.

 


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