June 2010 Archives

June 15, 2010

The Next Big Small Business Issue? Employee vs. Independent Contractor

The Department of Labor and Internal Revenue Service have joined forces in a "misclassification initiative" that will target small business employers who misclassify employees as independent contractors. How serious is this initiative? Well, President Obama's proposed 2011 budget allocates $25 million for this initiative. This additional funding will allow the Department of Labor to hire 100 more enforcement agents, and will also support grants at the state level to fund various incentive programs. The failure to properly classify an employee will result in heavy fines and penalties against employers. Why does the government care so much about this issue? Because the misclassification is costing the government billions in uncollected taxes; FICA and FUTA obligations.

Complicating the analysis of whether your workers are independent contractors or employees in Pennsylvania is that the state and federal courts focus on different factors. Even more troublesome, in some instances the state itself may have different tests depending upon which state agency you are before. For example, worker's compensation and unemployment compensation are both Pennsylvania state agencies, but each agency looks to different factors when making their determination. As the employer, you must be certain that your decision will satisfy all applicable criteria for the agency or department most likely to be evaluating your business. The analysis entails much more than just reviewing the old 20 part IRS control test. While many worker prefer an independent contractor classification, the risk to the business has just become too great to not conduct a thorough review and action plan.

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