Employee Misclassification Can Become an IRS Penalty

If you are an employer it is a good idea to know how to classify your workers. The IRS has estimated that millions of workers are not being classified correctly and therefore the IRS is losing large sums of revenue dollars that it could be bringing in. If an employer miss classifies an employee as an independent contractor, the employer will not withhold employment taxes and the income that was given to the misclassified employee may never be reported.

Employee Misclassification as an Independent Contractor

If you are an employer and you think you have misclassified one of your employees as an independent contractor it is very important that you begin to takes steps to rectify your mistake. This can stop your business from become the victim of an audit in the event the IRS notices that you have a misclassification of one of your employees.

Rectifying Your Mistake

One of the ways the IRS will allow you to rectify your mistake is through the Voluntary Classification Settlement Program. This program will allow an employer to reclassify their employees back from independent contractors so they can pay employment taxes that they did not when they were classified as independent contractors. This program is only eligible for employers that have filed 1099s for an employee for the previous three years.

How The IRS Can Catch You

There are many ways the IRS can become aware of a business that is not classifying its workers correctly. One of the biggest ways is through the National Research Program Employment Audits. This was something that the IRS started doing in 2010 to gather information about worker classification, fridge benefits and other types of details about a business. Once the IRS has determined you are not in compliance with your workers they will pursue the case until it is resolved. They are not allowed to simply drop a case that involved worker misclassification.

Another way the IRS would be able to determine if your business is not classifying workers correctly is through matching the 1099 given to your worker with the IRS records for that worker. If the worker received all their income from a single 1099 the IRS will be very suspicious and begin probing your business to make sure you are classifying your workers correctly.

A few additional ways the IRS may stumble upon your business for misclassifying workers is through questionable employment practices. The IRS has now teamed up with most state workforce agencies to share information on business employment records. They may also find you through a program called the state reverse file match initiative program. This program is dedicated to sharing tax withholding information with the IRS that has been given to the state. The information is then matched with the information that the IRS has on file. If the information does not match the IRS may pursue a business to learn more about this why it is not correct.

Form SS-8 & Form 8919

The last way the IRS will be able to find your business is through reviewing Form SS-8 and Form 8919 that are filed by your workers. When one of your workers files a Form SS-8 it is telling the IRS that they believe they should be treated as an employee and not as an independent contractor. When one of your works files a Form 8919 they are telling the IRS they have been misclassified and would like to report their share of uncollected employment taxes. Both of these forms will be traced by to their employer and the IRS will begin to investigate what needs to be done in order to begin to classify a business’s workers correctly. This may include penalties and in most cases some type of audit.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.


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